State of Sin

States are becoming increasingly permissive of various “sinful” economic activities and goods — those understood to be harmful for consumers — allured, at least in part, by the promise of tax revenue they represent. This has certainly been part of the rationale in my home state of Massachusetts, where within the last year the first full casino — MGM Springfield, located a few blocks from my apartment — and recreational marijuana dispensaries opened. Since the fiscal year just ended, now seems like a good time to assess how things are going in that regard.

First, the casino: Before opening its doors, MGM Springfield told state regulators it expected $418 million in gambling revenue over its first full twelve months of operation — $34.8 million per month. According to the Massachusetts Gaming Commission’s June 2019 report, it hasn’t come within $7 million of that mark yet.

MGM revenue

Since September, its first full month of operation, the casino has generated nearly $223 million in gambling revenue. The state’s take is a quarter of that, about $55.7 million. That’s two-thirds of what was estimated. MGM Springfield’s President attributes its lower-than-expected revenue to a poor projection of the casino’s clientele — fewer “high rollers” from the Boston area and more from up and down the I-91 corridor.

The introduction of new avenues for gambling is well known to cannibalize existing revenue sources. So add to MGM Springfield’s list of woes that the much flashier Wynn Casino recently opened in Everett, MA, a quick trip from Boston, and that neighboring East Windsor, CT is opening another casino next year.

casinos

Massachusetts’ venture into marijuana has been slightly more successful. Sales were supposed to begin in July 2018, the start of the fiscal year, but were delayed until November. Still, the State Revenue Commissioner estimated Massachusetts would collect between $44 million and $82 million from the combined 17% tax (Massachusetts’ normal 6.25% sales tax plus a 10.75% excise tax) over fiscal year 2019. If my math is right, that works out to an expected range of about $32 million to $60 million in sales every month for the remaining eight months of the fiscal year, a threshold met for the first time in May, according to sales data from the Massachusetts Cannabis Control Commission.

Marijuana revenue

As of June 26, the last time the data were updated, marijuana sales totaled $176 million, which would put tax revenue somewhere around $22 million this fiscal year. Not bad, but not a great show either — and a bit surprising to me, given the traffic I’ve had to wade through passing a dispensary on my way to work. Furthermore, the state is probably constrained in its ability to raise the excise tax on marijuana, since that could push buyers back into the informal market. And as more states in the region legalize, there’s a good chance sales will drop off somewhat.

On the other hand, sales of marijuana are clearly ramping up as more stores open, and making projections about a brand new industry can’t be easy. I think people more knowledgeable about the regulatory rollout would also contend that Massachusetts bureaucrats are at least partly responsible for the relatively poor sales. The first shops were concentrated in low-population areas of the state, and the closest one to Boston didn’t open until March. Still, the state was off on this one, too. (I thought I was the only one to notice this, but I guess not.)

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A few admittedly tangential reflections on this: The positive spin on the commercialization of marijuana and the proliferation of casinos is that the state is growing more respectful of individual autonomy, abandoning harmful and ultimately unsuccessful prohibitive policy and allowing market forces to dictate what forms of entertainment are viable. If the state should make a few bucks in the process, all the better. Right?

Well, maybe. My natural sympathies lie with the above assessment, but the state’s financial incentive complicates the picture — especially insofar as new sin taxes are attractive alternatives to the prospect of raising traditional taxes.

Taxing the consumption of vices is a markedly regressive form of revenue generation. The most salient example of this is tobacco: its use is more common among those with less education and those below the poverty line, and among smokers, those populations suffer greater negative health effects. But it’s also broadly true that the majority of profits derived from the sale of vices tend to be concentrated among a relatively small group of “power users.” The top tenth of drinkers consume half of all alcohol sold in the United States, for example. I don’t have any data on this at the moment, but if I had to guess, the pathological consumption of vices is probably negatively correlated with the propensity to vote.

The cynical take, therefore, is that the newfound permissiveness of the state is a financially motivated abdication of the state’s most fundamental obligations, a mutually beneficial pact between “limbic capitalists” and politicians.

Ironically, sin taxes have notable limitations as revenue-raisers. For one, unlike other taxes, sin taxes are supposed to accomplish two contradictory goals: curbing consumption and raising revenue. Attention to the former usually requires that tax rates be imposed at higher than revenue-maximizing points. This can also encourage regulators, as with alcohol and tobacco, to tax on a per-unit basis, tying revenue growth to consumption patterns. While they may be tempting stop-gaps, sin taxes are not a long-term budgetary fix, and analysis of their social costs and fiscal benefits should bear that in mind.

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