Millions in 'sin taxes' flowing into Minnesota's coffers during COVID-19 pandemic

Annie Santos headed to the store for some emergency supplies after a distressing message from her children's school.

"We just got the e-mail from school saying, 'We're switching to distance learning,' " Santos said, laughing in the parking lot of the St. Paul Haskell's. "So I'm like, I'm going to go get wine."

Stressed-out parents are pouring themselves an extra glass. Workers stuck at home are breaking up the monotony with more frequent smoke breaks or punctuating the day with a post-work beer. And people seeking a little excitement — or avoiding casinos — are rushing to the lottery and pulltabs as a welcome distraction.

Minnesotans' extra spending on those vices is adding up.

State revenue from the so-called "sin taxes" was nearly $37 million more than predicted in July through September. Tobacco tax dollars alone were $20 million more than anticipated, and collections from some types of gambling, like pulltabs and bingo, were double what was expected.

The growth in revenue in these areas comes as the pandemic has hurt many businesses, nonprofits and families across the state, leaving the state with a projected deficit of $2.3 billion over the two-year budget cycle.

It is not just Minnesotans who are indulging. Sin taxes are an area where pandemic-rattled state budgets appear to be holding strong across the country, said Brian Sigritz with the National Association of State Budget Officers. As governors and legislatures scramble for options to shore up massive budget gaps, Sigritz said he expects more states will consider increased sin taxes as well as legalizing sports betting and recreational marijuana. Minnesota has not legalized either of those, but the proposals have been floated in years past.

House DFL Tax Committee Chairman Paul Marquart rejected the idea of increased taxes on tobacco, alcohol or gambling. He said he opposes any regressive taxes that hit poor people harder. His Senate counterpart, GOP Tax Chairman Roger Chamberlain, declined to comment. A spokesman for Democratic Gov. Tim Walz said it is too soon to weigh in on the subject, and the governor has not yet discussed raising those taxes. However, Walz and House DFL leaders support legalizing recreational marijuana.

As state leaders are trying to figure out how to weather the pandemic, so are Minnesotans. People are grappling with losing family members or their jobs and struggling with the emotional and logistical challenges of social distancing.

Lance Klatt, executive director of the state Service Station and Convenience Store Association, said he suspects the rise in lottery and tobacco sales is due to Minnesotans seeking a diversion during a year of deep uncertainty.

"When people are just stressed out, they turn to tobacco and alcohol to get through it," Klatt said. "Maybe people said, 'Hey, if I'm going to socialize, I'm going to do it at home and smoke a cigar or smoke cigarettes.' "

Customers at Twones Tobacco in St. Paul have told manager Emrah Kadric there are just fewer things to do so they are using their vape pens, chewing tobacco or other products more often. Kadric said he isn't seeing a lot of new customers, but the usual people are buying more. He estimated sales have been up 20% during the pandemic.

Jordan Scott has been an on-and-off cigarette smoker. The Minneapolis resident started back up since he's been working from home.

"It's easier to go out for more breaks," Scott said. He's also buying more alcohol and "cracking that first one open a little earlier than before."

However, he said his liquor store purchases have increased largely because he doesn't go out to drink anymore.

"I haven't gone out to a bar since they really all shut down in March," Scott said.

From July through September, the state netted roughly $2.5 million more in alcohol tax revenue than expected.

"It's a faster pace, there's no doubt about it," said Brent Gregoire, manager of the Haskell's liquor store. "They are buying a little more, less frequently. They make a little bit bigger purchase so they don't have to go out as much."

People are not just spending more than anticipated on booze, tobacco and gambling. Sales tax revenue in general was 26% higher than predicted for July through September, with the federal unemployment insurance payments helping buoy spending, state economist Laura Kalambokidis said.

An extra $20 million in tobacco taxes and $2.5 million from alcohol sounds small when total state revenue for the year is about $21 billion. But the state is facing a multibillion-dollar hole for the current two-year budget and a bigger shortfall in the years after that, Kalambokidis said.

"What look like relatively small revenue sources all matter," Kalambokidis said. "A $20 million program could be extremely important to quite a number of Minnesotans."

The biggest revenue surprise, Kalambokidis said, was the jump in lawful gambling, which includes pulltabs, bingo and raffles.

State budget officials predicted they would get $9.5 million in tax revenue from that type of gambling in July through September. They got more than $21 million.

Pulltabs made up 94.5% of lawful gambling sales last year. While electronic pulltabs are growing in popularity, the old-school paper ones common in bars across the state account for most sales.

The popularity of lawful gambling has climbed over the past decade, said Gary Danger, a compliance officer for the Minnesota Gambling Control Board. They were preparing for March to be their biggest month ever, then halfway through the month, Walz shut down bars and restaurants. There was a pent-up demand when things reopened in June.

"Things have come back bigger than ever," Danger said.

Like pulltabs, Minnesota lottery purchases have been growing for years. But 2020 has been a significant jump, state lottery Executive Director Adam Prock said. In July through September the state's lottery sales were up 25% to nearly $181 million, compared to the same time last year.

Klatt, who represents the gas station and convenience stores, said they are likely selling more scratch-offs and other lottery games because people are not going to the casinos as much.

Prock said customers tell them it is a way to bring a little fun into another night at home.

"People say, 'Well, my husband and I don't do puzzles. We buy a few dollars in lottery tickets and it's become our Friday night thing,' " Prock said. "We're filling that niche right now."

Jessie Van Berkel • 651-925-5044