Sin Tax No Answer to Spending Addiction

The state of Wyoming earmarks tobacco settlement funds to certain programs — and guess what. The programs cost more than the revenue they receive. As you might expect, the knee jerk reaction to this is to raise tobacco taxes to cover the shortfall. But let's take a closer look.

The Tobacco Settlement Trust Fund was set up after a 1998 settlement between tobacco companies and 46 states, including Wyoming. In addition to the original trust fund interest, the state receives annual payments from tobacco companies into perpetuity. Earnings from the fund and these annual payments go into an account to pay for a group of programs. Now, as the cost of these programs predictably escalates, the account is running a deficit.

The Tobacco Trust Fund Settlement Account holds about $85 million and earns about $1.7 million per year in interest. The fund itself is inviolate. The state expects to receive $17 million from the tobacco companies in 2017 and 2018, giving it $37.4 million for the biennium to spend on a list of programs.

Problem is, the programs cost $50.6 million. This means for the 2017-18 biennium, the state is $14.6 million in the hole.

What gets funded?

According to Wyoming Statute 9-4-1203, settlement funds are spent to improve the health of Wyoming citizens including tobacco use prevention and cessation, and for programs to prevent and intervene in alcohol and substance abuse. Adding substance abuse to the list of approved spending allows money to continue to flow to spending programs even as the number of smokers in Wyoming declines.

Funded programs for the most part fulfill this legislative mandate. Three departments, the Attorney General, Family Services, and Health, receive tobacco funds. For the 2015-16 Biennium, $860,000 in the Attorney General's office funds administration, $6.4 million in the Department of Family Services funds juvenile substance abuse prevention and treatment, $26.5 million in the Health department funds substance abuse and a bevy of other programs and $11.7 million in Corrections funds mostly substance abuse programs. Seems to be a lot of overlap and worse—no information can be found on the effectiveness of these programs.

The Labor, Health and Social Services Committee of the Wyoming legislature prioritized these programs. By cutting out all medium and low priority programs, including one of the nine substance abuse program, they could achieve savings of about $11 million. This does not go far enough.

Wyoming's annual tobacco payment has been trending downward since about 2009, in part because of declining tobacco consumption. But tobacco consumption has been on a downward trend for much longer. Since 1996 (when sales data first became available), cigarette consumption in Wyoming has declined. But throughout the US, cigarette consumption has declined since the late 1960s.

Given that people are smoking less, what has one half of Cheyenne's brain trust said might be a solution to the budget deficit? Eliminating low priority programs and reducing program duplication to lower costs? Of course not! They would prefer to raise cigarette taxes. Currently, the tax per cigarette pack is 60 cents. According to Campaign for Tobacco Free Kids, a $1 increase per pack could raise $21.1 million, and voila, the deficit door is closed. However, with fewer people smoking, higher tax rates are unlikely to feed the states spending addiction for long.

Cigarette tax revenue has been falling relatively steadily since 2006 when it peaked at $21 million into the general fund and $3.7 million for local governments. In 2015, revenue into the general fund fell to $16.3 million and to local government, $2.9 million. If cigarette taxes do further reduce smoking, government revenues might not get the boost tax-hike cheerleaders are expecting.

Sin taxes are like an albatross hanging about the necks of taxpayers. Tax revenue supports entitlements that end up costing more and more. But as people shift to healthier lifestyles, the behavior these programs depend on disappears. This means government's attempt to fund programs with higher cigarette taxes is unsustainable. Instead of raising taxes to fund program costs that are escalating out of control, it is time to streamline these programs, make their outcomes transparent and accountable, and bring spending down to a level taxpayers can afford.