Finding no other palatable source for additional revenues to balance his 2006 budget, Chicago Mayor Richard M. Daley has settled on a big increase in city cigarette taxes.
The proposal, deemed by insiders as likely to be approved by the Chicago City Council, would increase the city’s 48 cent cigarette tax by 20 cents a pack, a 42 percent hike. That brings Chicago’s tax bite on cigarettes to 68 cents a pack, one of the highest city cigarette tax burdens in the nation.
Combined with a $1 a pack tax imposed by Cook County, 98 cents by Illinois, and the 31 cent federal tax, the total tax burden for cigarettes purchased in Chicago will amount to $2.97, or almost half the price of a pack.
The city’s Office of Budget and Management calculated the price increase would depress cigarette sales in the city by 6 percent, yet still produce $9 million in new revenues to help balance the $5.2 billion budget.
Last Resort, City Says
The administration reportedly considered other tax increases, including a new levy on express deliveries by companies such as United Parcel Service and Federal Express. A budget office spokeswoman would not confirm what other taxes might have been considered but said the administration settled on the cigarette tax as a “last resort.” The tax, she said, is levied on a product that “consumers can choose to purchase or not [purchase].”
In presenting his budget in early November, Daley called the tobacco tax “the least painful.” He noted his proposed budget will make “three years in a row that the city has not raised property taxes.”
The cigarette tax hike proposal reignited arguments about the pros and cons of making tobacco the favored target of tax increases. Some cite the health benefits of raising the cost of an addictive product, pointing to a World Health Organization claim that every 10 percent increase in cigarette taxes generates a 4 percent reduction in consumption.
Aims for ‘Contradictory Goals’
Jeff Lenard, a spokesman for the National Association of Convenience Stores, said while the taxes “are probably well-meaning,” they are designed to achieve two contradictory goals–increase revenues and reduce smoking.
“If one happens, the other can’t. Both can’t happen [simultaneously],” he said. “When prices increase, you don’t see longtime smokers say ‘I’m quitting.’ In general, the first thing they do is look for a cheaper product.”
Cigarettes are almost as price-sensitive as gasoline, Lenard said. “If you are a nickel or dime away from somewhere convenient, you’ll go there.”
Bulk Buying, Bootlegging Increase
Among the alternatives are buying bulk from adjacent lower-tax jurisdictions and buying on the Internet. The tax disparity also encourages bootlegging, which generates additional enforcement costs, Lenard said.
“There’s probably nothing that organized crime would like more than going to higher cigarette taxes,” Lenard said.
R.J. Reynolds Tobacco Co. argues the unfairness of the tax on its Web site, noting the tax hits consumers, not cigarette manufacturers. In 2004, “government profit” accounted for 49 percent of the cost of the average retail price of $3.82 a pack. “Manufacturer’s profit” accounts for only 4 percent, according to Reynolds.
“Tobacco excise taxes are regressive, unfairly forcing adult smokers to pay a greater percentage of their incomes in excise taxes than those in higher income groups,” the company said on its Web site.
Dennis Byrne ([email protected]) is a Chicago writer.