Illinois Dodges Cigarette Tax Hike

Published July 1, 2005

Illinois Gov. Rod Blagojevich’s (D) FY 2006 budget tacitly admitted anti-tax activists were correct last year in predicting cigarette tax increases would bring in far less revenue than estimated.

Cook County and Chicago both raised taxes on cigarettes last year, and anti-tax activists argued the new taxes would drive smokers into the black market or onto the Internet, thus depressing tax revenue. Blagojevich’s 2006 budget admitted those critics were correct when it acknowledged “total revenue from the [statewide] cigarette tax is forecast to come in significantly below budget, due to the Cook County tax increase of $0.82 in April 2004 and the subsequent increase of the City of Chicago’s cigarette tax.”

Chicago tripled its cigarette tax from 16 to 48 cents a pack.

Proposed New Hike Anyway

Nonetheless, Blagojevich presented a budget calling for a 75-cent hike in the state cigarette tax, taking it to $1.73 a pack. With Chicago and Cook County taxes, cigarette buyers in Chicago would have paid $3.21 a pack.

After a flurry of activity to beat a May 31 deadline to pass a budget with a simple majority, the Illinois General Assembly passed its FY 2006 budget without a cigarette tax hike. The budget relied mainly on deferring more than $2 billion of payments into the public employee pension systems over the next two years to achieve balance.

Backers of a cigarette tax hike are likely to try again.

Hikes Hurt Nonsmokers Too

The perception that tobacco taxes affect only smokers is false, said Peter Gill, spokesman for the Illinois Retail Merchants Association. High taxes on tobacco have two potential consequences: Smokers will quit, or they will find out-of-state sources for tobacco. In both instances, hard-working neighborhood merchants suffer, and the result of their suffering is a loss of economic activity and tax revenue for the people of Illinois.

“Forty percent of Illinois consumers live within a half hour of a state border. They have easy access to stores in other states,” said Gill. “We’ve heard of smokers forming private buying groups, where somebody will drive to Indiana or one of the other neighboring states [Iowa, Kentucky, Missouri, or Wisconsin] and buy cigarettes for four or five other guys all at once. And, of course, while they’re buying cigarettes, they’re usually buying other things, maybe stopping for dinner, taking in a show, spending money.”

Gill said shoppers rarely go to a store for a single item. If one item becomes too difficult or expensive to buy, sales of other items also decline.

This is borne out by an analysis the Illinois Policy Institute conducted using the State Tax Analysis Mapping Program (STAMP) to determine the implications of proposed tax policy. Illinois-STAMP uses accurate and robust economic data and a few tested assumptions about human economic behavior to produce qualified but accurate impact analyses of state tax policy.

Huge Job Losses Projected

Simulations assessing the potential impact of Blagojevich’s proposed 75-cent increase in the cigarette tax found it could have cost the state as many as 7,878 jobs in 2006. Over five years the projected job losses would have reached nearly 50,000.

The biggest hit would have been taken by the retail industry, which would have lost 5,914 jobs in 2006. Many other industries also would have lost jobs as an indirect effect of the tax, including hotels (227), business services (134), personal and repair services (152), and construction (210).

Moreover, as the cigarette tax was increased, sales tax revenue would decrease, making the budget overly reliant on tobacco. In just the first year the state would have lost $28 million in sales tax revenue, according to the STAMP simulation. By 2010 that figure would have climbed to nearly $36 million.

The sales tax losses stem from the fact that smokers often buy other convenience items, such as gasoline, milk, and coffee, when they purchase their cigarettes. If smokers drive to neighboring states to buy their cigarettes, they probably will buy some of those other items there as well, the simulation noted.

Mike Van Winkle ([email protected]) is a policy analyst at the Illinois Policy Institute.