Ally Bonville, left, and Skylar Shearer sell alcohol to customers at Broadway Variety in South Portland on Wednesday. Shawn Patrick Ouellette/Staff Photographer

Alexander Hamilton, the first U.S. treasury secretary, is often credited for developing the country’s first so-called sin tax, even though it wasn’t exactly a success.

His tax on whiskey – pitched as a way to pay debts incurred during the Revolutionary War – was wildly unpopular, and it led to the Whiskey Rebellion and, later, a repeal by President Thomas Jefferson.

Since that time, sin taxes – generally defined as taxes on things that are considered bad for you, like alcohol, tobacco, marijuana and gambling – have become an accepted, and increasingly lucrative, way to pay for government services.

Maine has been all in.

The state has seen a 25% increase in revenue from sin taxes in the last five years, according to an analysis by the Portland Press Herald/Maine Sunday Telegram. The biggest increases have been in proceeds from the state’s two casinos and in the sale of recreational marijuana, which wasn’t legal five years ago. But tobacco tax revenue has gone up, too.

Collectively, sin taxes now account for about $353 million a year, or 7% of the state’s $5.1 billion annual budget.

Adam Hoffer, director of excise tax policy at the Tax Foundation, a nonpartisan but right-leaning Washington, D.C., think tank, said alcohol, tobacco and gambling have long been reliable, though sometimes volatile, sources of revenue for states. And new markets for cannabis and sports betting have been a windfall for some.

“It’s a welcome relief valve for states that have been facing some financial pressure, and in other areas it has allowed for more structural reforms,” he said.

Isaiah Seltzer helps a customer with their cannabis purchase at The Joint.me on Friday. Brianna Soukup/Staff Photographer

Richard Auxier, a researcher with the Tax Policy Center, which is also nonpartisan but more independent, said sin taxes are a murky area of tax policy. Historically, taxes on cigarettes, for instance, have been expressly levied to dissuade people from smoking. And that has worked, to some degree.

But with things like marijuana and gambling, Auxier said, states don’t even pretend the taxes are meant to slow demand.

The tax on legal marijuana was less about limiting use and more about making sure the state got its cut. Many states, Maine included, actively promote gambling, both through its casinos and the lottery.

Although high taxes on cigarettes have likely contributed to reduced rates of smoking, there isn’t overwhelming evidence that the taxes on alcohol and marijuana have any impact on demand. A pack of cigarettes includes a $2 tax, whereas most liquor is taxed at $1.25 per gallon.

Sin taxes are sometimes criticized because they are a regressive tax, meaning they disproportionately affect low-income consumers.

“Across the board, you can say excise taxes are regressive, but so are sales taxes. That doesn’t mean they shouldn’t be used,” Hoffer said.

Added Auxier: “Is it great that revenue from sin taxes is going up? No, because we know they are volatile, and they come from behaviors we want to mitigate. States need to have their eyes open on this. They shouldn’t be on autopilot.”

Any changes to the tax structure here, however, are complicated and politically challenging.

“There is tension, but the Legislature has to consider the consumer,” said Rep. Joseph Perry, a Bangor Democrat who co-chairs the Taxation Committee. “And there is not a lot of appetite anywhere for raising taxes, especially when we have record revenue.”

Sen. James Libby, a Republican from Cumberland who serves on the same committee, cautioned against lumping all sin taxes into the same category.

“I try to take each of them different,” he said. “You have to look at all the different impacts on systems. It’s a calculus.”

“I’m not sure we always made the best decisions in the past,” he added.

A CLOSER LOOK

Using data provided by Maine Revenue Services, the Maine Bureau of Alcoholic Beverages and Lottery Operations and the Maine Office of Cannabis Policy, the Press Herald found that revenue and proceeds from sin taxes increased from $281 million in 2019 to $353 million last year.

For marijuana and cigarettes, that captures a dedicated tax on sales. For alcohol, it includes taxes levied when consumers purchase at retailers and when they buy and consume on-site. And for gambling, it includes the state’s net proceeds from both lottery ticket sales and activity at the state’s two licensed casinos – Oxford Casino and Hollywood Slots in Bangor.

Here’s a breakdown of the 5-year changes:

• Taxes on cigarettes and tobacco increased from $126 million in 2019 to $149 million in 2023 (an all-time high).

• Gambling proceeds at the two casinos topped $70 million in 2023 for the first time, an increase from $58.5 million in 2019. Sports betting is still new in Maine – having just gone live late last year – but the state’s share of proceeds for the first quarter of 2024 was $1.2 million.

• Alcohol taxes were the only category that saw a decrease, from $26.6 million to $25 million.

• Lottery sales increased steadily from 2019 to 2023, resulting in a transfer increase of $62.6 million to $72 million

• Finally, legal marijuana sales were $217 million in 2023, an increase from $82 million in 2021, the first full year after legalization. Combining legal and medical marijuana tax revenue, Maine earned $36.9 million in 2023, compared with just $7.6 million in 2019 before legalization.

Assessing how much Maine relies on sin taxes compared with other states is difficult because of the data compilation involved and because every state sets its own policies and rates.

Maine’s 10% tax on marijuana is slightly lower than in Massachusetts (10.75%) but considerably lower than in Colorado and California, which tax sales at 15%. And many states still don’t allow legal recreational use.

Maine’s tax on cigarettes – $2 per pack – is well below several other states, including every other New England state except New Hampshire, according to the American Lung Association. States that have the lowest tax rates on cigarettes are in the South.

The Tax Foundation ranks Maine 11th among states (and highest in New England) for its excise tax on alcohol spirits.

An analysis by the Pew Foundation in 2018 found that Maine ranked 16th among states, with 5.2% of the state budget made up by sin taxes. Nevada, to no one’s surprise, led the way at 12%.

New Hampshire ranked 5th, at 7.9%, which seems surprising until you remember the state doesn’t have a general sales tax.

The U.S. rate in 2018 was 2.3%, well below Maine.

However, that analysis only included taxes from alcohol, tobacco and gambling. Sports betting and marijuana hadn’t yet been legalized in Maine, so that percentage has now increased.

The increase in Maine is at least partially responsible for the positive economic outlook here. During Gov. Janet Mills’ tenure as governor, the state has seen increasing tax revenue from most sources, and the state’s budget has grown accordingly. Mills has even set aside the statutory maximum for the budget stabilization fund (the rainy day fund), roughly $970 million.

Packs of cigarettes line shelves at Casco Variety in Portland. Gregory Rec/Staff Photographer

WHERE DOES THE MONEY GO?

The taxes levied on alcohol, tobacco, gambling and marijuana and varied and complicated, but so, too, are the formulas for where the money goes.

“When you put a special tax on anything, you have to ask why. If the idea is that it’s dangerous or causes harm or affects a third party and we want to marginalize consumption, OK, but we should be strategic if we’re generating revenue,” said Hoffer, with the Tax Foundation. “States should at least use some of the proceeds for prevention, for instance.”

That does happen in Maine, but the tax money flows through a wide variety of programs.

A portion of alcohol taxes are dedicated to drinking water systems, wastewater treatment and the Department of Transportation’s highway and bridge fund.

A portion of the marijuana tax goes to support state health and safety measures around cannabis use, but most go to the general fund.

Gambling proceeds are split based on complicated formulas – one for Oxford Casino and a separate one for Hollywood.

At Oxford Casino, 46% of net revenue is collected by the state and distributed to 13 different areas – the biggest of which is the Department of Education. The town of Oxford gets 2% of net proceeds and has used that money – about $16 million over the last decade – to make municipal investments in public safety and other capital purchases. It also helped pay for a new wastewater treatment facility.

At Hollywood, the state takes 39% of slot machine revenue and splits it among 11 sources, the biggest being the Fund for Healthy Maine, which was first established with Maine’s share of tobacco settlement money and now supports a variety of health-related programs.

Oxford Casino.  Robert F. Bukaty/Associated Press

Like Oxford, the city of Bangor gets a share.

Perry was closely involved in the effort to bring a casino to Bangor. One of the major selling points for local officials was securing a big portion of proceeds to help pay for the construction and operation of a new convention and civic center. That has been a benefit to Bangor, he said, but at what cost?

“We’ve got a casino here, yes, but if all that money people gambled away was back in the economy, we might be better off, I don’t know,” Perry said.

Perry owns a convenience store in Bangor. He’s seen countless customers over the years spend big on cigarettes and lottery tickets, and he’s not always comfortable with the state generating revenue off the backs of people who don’t have extra money.

Tax experts say there are inherent challenges to dedicating revenue.

“Any time you tie a tax to the sales price of something, it’s risky because prices can be volatile,” Hoffer said, using marijuana as an example. If supply is abundant, the price is simply going to drop, which mean less tax revenue even if sales are unchanged.

“Voters love when you earmark revenue for something,” said Auxier, with the Tax Policy Center. “They love being told this much money will go to education. But people like me get nervous because those programs are volatile. If revenues go down, you say, ‘Well, we can’t help kids.'”

California recently banned menthol cigarettes, reasoning that they were more attractive to younger consumers. But that ban resulted in a massive revenue loss, and the state’s tobacco tax is tied to educational programs, so that became a big problem.

Sal Demasi laughs as he buys Gimme 5 and Powerball lottery tickets from June Duchesneau at Casco Variety in Portland on Friday. Gregory Rec/Staff Photographer

Maine’s Legislature has so far rejected a ban on flavored tobacco, a proposal critics have argued would rob the state of tax revenues and send consumers – and their tax dollars – to neighboring New Hampshire.

Colorado earmarked a bunch of its sports betting programs to the state’s water authority, and officials had ambitious plans for some of that money. But when proceeds came in less than expected, they had to shift.

Maine lawmakers are worried that marijuana proceeds could level off or even decrease, but most of that goes to the general fund, so the impact might be blunted if other revenues rise.

“I’m more inclined to support something that’s not dedicated because you don’t want to attach one policy to another,” said Libby, the Cumberland state senator.

As Maine continues to bring in more money from sin taxes, the conversations about whether any adjustments need to be made likely will continue.

“The story that I try to tell over and over is that tax design matters and getting it right as early as possible matters,” Hoffer said. “Maine has taken a lot of good steps. The cannabis tax is well defined, and if they can figure out permitting for sports betting, that will improve things. Overall, Maine’s tax rates are reasonable compared to outliers. They are doing a pretty good job of being on top of these issues.”