West Virginia ranks third in the United States in the percentage of state revenue that comes from so-called "sin taxes," lawmakers considering ways to revamp the state's tax system were told Tuesday.
More than 11 percent of the state's budget is funded by gambling, alcohol and tobacco - and most of that money comes from casino and video lottery revenue, according to a Governing magazine study. Meanwhile, the state's 55-cents-a-pack cigarette tax is the sixth-lowest in the country.
Tuesday's session of the legislative Joint Committee on Tax Reform focused on sin taxes - including the state Lottery, which oversees a gaming empire that, while fading from its peak year of 2009, still provides the state more than $500 million a year in revenue. Only Rhode Island and Nevada receive a bigger percentage of their state revenue from sin taxes.
Committee members also were updated on state taxes of beer, wine, liquor and tobacco products.
After the meeting, House Finance Chairman Eric Nelson, R-Kanawha, noted that while state taxes on alcohol are roughly comparable with national averages, tobacco taxes are low - and there's no excise tax on the growing market for electronic cigarettes.
"The e-cigarette is a growing segment, and one that needs to be looked at," Nelson said.
Jared Walczek, a policy analyst for the Washington, D.C.-based Tax Foundation, which describes itself as a nonpartisan think tank, said increasing the state's cigarette tax from 55 cents to $1.50 a pack would increase cigarette tax collections from the current $100.4 million a year to about $121 million.
States that have increased cigarette taxes have seen decreases in consumption, increases in smuggling of cigarettes from lower-taxed states, and increases in purchases across state lines to lower-taxed states, he said.
Because of the relatively low cost, about 20 percent of all cigarettes purchased in West Virginia are resold elsewhere, he said. Conversely, in New York City, with the nation's highest cigarette tax, at $5.85 a pack, estimates are that half of all cigarettes sold there are smuggled.
Unlike other taxes, Walczek said the first year of cigarette tax hikes usually produces the "high-water mark" in tax collections, with revenue declining each subsequent year.
That's, in part, because cigarette consumption is steadily declining. Walczek noted that, in 1965, 42 percent of all adults were smokers, a percentage that has dropped to 19 percent now and is projected to fall to 12 percent by 2020. (West Virginia has the highest percentage of smokers in the United States, at 27.3 percent, but that percentage also is declining, he said.)
Meanwhile, Liz Pardue, tax analyst for the Department of Revenue, said West Virginia's 18-cent-per-gallon excise tax on beer - which was last increased in 1951 - is below the national average of 29 cents. However, the state's $1-per-gallon excise tax on wine is above the 84-cent national average, and higher than most neighboring states.
In a somewhat unique situation, the West Virginia Alcohol Beverage Control Administration operates as the state's liquor wholesaler, selling liquor to retail outlets at a 28 percent mark-up, producing about $16 million a year in revenue, ABCA Commissioner Ron Moats told the committee.
Moats said having the ABCA act as the state's liquor wholesaler is a "very efficient system" that keeps liquor prices comparatively low, since the state is not subject to federal taxes that private wholesalers would have to pay.
He said retailers also prefer dealing with a single wholesaler for liquor, as opposed to beer, where there are 30 wholesale distributors around the state.
Moats said it makes sense for the state government to have greater control over liquor sales, noting, "Liquor is a highly regulated product for a reason, for all the problems it can cause."
Pardue noted that while the tax on beer is relatively low, beer accounted for 69 percent of all alcohol taxes collected in the 2013-14 budget year, with liquor accounting for 20 percent and wine at 11 percent.
Interestingly, beer tax collections decreased from about $7.6 million in 2010 to $7.4 million in 2014, while sales taxes collected on beer purchases increased from $23 million to $24 million during that period, suggesting a sales trend toward higher-priced beer.
Also Tuesday, West Virginia Lottery Director John Musgrave said that while Lottery revenue is down $300 million from its peak, he does not believe any of the state's five casinos are at risk of closing.
For years, he said, West Virginia enjoyed a monopoly in the region when it came to casino gaming, adding that many of the newly opened casinos in Ohio and Maryland are not meeting revenue expectations.
"What's happening is the market really is over-saturated," he told the committee.
Reach Phil Kabler at philk@wvgazette.com, 304-348-1220, or follow @PhilKabler on Twitter.