The Problem With Building Programs on Sin Taxes

There’s good news and bad news in Arizona right now. The good news: The smoking rates in Arizona are going down. The bad news: Lower smoking rates mean less pre-k funding. $26 million less, in fact.

That’s because Arizona funds pre-k with a tobacco tax. In 2006, Arizona voters passed Proposition 203, which added a 4-cent tax per cigarette to fund the state’s pre-k program and created a statewide office, First Things First, to oversee the program.

Using tobacco taxes – and other sin taxes – to fund initiatives is a politically popular approach. Set aside for a minute that sin taxes are inherently regressive (e.g., the people footing tobacco taxes generally have lower income and education levels). In Arizona’s case, a tobacco tax feels like a win-win: the state introduces an economic incentive to reduce cigarette consumption and funds early education without going through the vagaries of appropriation.

But Arizona’s experience also shows it’s not a long-term solution to funding early childhood education. The smoking rate in Arizona has decreased over the past several years and, with it, funding for pre-k. In FY09, the state’s tobacco tax pulled in $141 million; the estimate for FY14 is $115 million. First Things First stockpiled money in the first few years because it started collecting taxes before it was required to disburse funding, so right now there’s a cushion. But as less tobacco tax money is coming in, dipping deeper into the fund will be necessary.

Which brings us to the problem with building a program on sin taxes: sometimes incentives work. Tobacco taxes are not a sustainable substitute for state fiscal commitment in early education.

To account for the loss in state funding, First Things First is changing their allocation structure. Right now, pre-k funding flows from First Things First to regional councils to pre-k providers. The regional councils, entirely run by volunteer community members, decide which providers get funding. If selected, a provider typically receives a number of state-funded pre-k slots that correlates with the size and quality of their program.

Starting next July, however, those volunteer-led regional councils will determine both which providers get slots and how many slots they should receive. First Things First will fulfill those requests if they can, funding the highest quality providers first, but there’s no guarantee that providers will receive any funding at all. The short-term consequence is uncertainty; the long-term consequence is fewer students being served.

Arizona isn’t the only state with issues funding pre-k through a sin tax. California is facing decreasing tobacco tax dollars, North Carolina and Georgia have had trouble with inconsistent or insufficient lottery revenue, and Arkansas’ beer tax was all over the place for the few years it existed. (President Obama’s Preschool for All initiative is supposed to be funded through a tobacco tax, but smoking trends nationally are also going down.)

Funding state pre-k through a tobacco tax is politically palatable and a fine place to start looking for funding. But if we’re serious about our commitment to early education, we can’t take the shortsighted, easy win — we need to prepare for the eventuality that the money won’t last forever.

2 thoughts on “The Problem With Building Programs on Sin Taxes

  1. Chris Pencikowski

    Hi – that makes sense, but what about using sin taxes as a revenue stream for Social Impact Bonds? I.e., if you have the up-front costs to support Pre-K and know that, in the long run there will be cost savings (e.g., reduced prison costs) and increased tax revenues (through increased earnings), couldn’t this balance out costs over the long haul? I’d love to see a progressive governor (or Mayor) try something like that…

  2. James

    It looks like we may need to come up with new “sins” to tax if cigarette consumption is down? It’s unfortunate that the concept of budgeting, and simply paying, for the “needs” of the community isn’t a politically viable solution and instead we’re left with creating schemes to make it look like “someone else” is actually paying.

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