Research & Commentary: Illinois Cigarette Tax Won’t Fix Medicaid

Published May 17, 2012

After raising the state’s personal income and corporate tax last year, Illinois is considering a $1 per pack hike in the state’s cigarette tax. Advocates claim the tax would help pay for ballooning Medicaid costs, which are over budget by $2.7 billion.

Such an increase, however, fails to address the structural problems of the Medicaid program and would disproportionately burden low- and moderate-income Illinoisans and create numerous unintended consequences. The continuing need for new revenue sources shows the real problem in Springfield is inefficiency and lack of spending restraint, not insufficiently high taxes.

According to the Tax Foundation, Illinois already has the 13th highest tax burden in the nation. This has contributed to the weak job growth and out-of-state migration of the past decade.

The experiences of other states confirm this already-narrow and shrinking tax base is an unreliable and regressive means to address a budget shortfall. Thus there is a strong correlation between high tobacco taxes and high overall tax burdens. A National Taxpayers Union study found, “Taxpayers face a seven out of 10 chance of seeing another net annual tax hike within two years of a tobacco tax hike.”

The governor and other advocates of a cigarette tax hike ignore the fact that these very “fixes” helped bring on the current budget problems. Illinois legislators should focus on giving consumers more control over their health care and reforming the state’s inefficient Medicaid program.

As the documents cited below explain, lower taxes and reduced spending are a sustainable solution to budget deficits while cigarette tax increases are not.

Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes
This Heartland Institute Research & Commentary explains how targeted tax increases on items such as cigarettes push sound fiscal policies and real budget reforms to the public policy back burner.

An Open Letter to the Illinois General Assembly: A Tax Hike Is Not a Spending Cut
The Illinois Policy Institute explains that raising taxes will do nothing to reduce Medicaid obligations and simply means more taxes and more spending: “Members of the General Assembly who reject the harmful ‘tax and spend’ habits of the past have good reason to reject this plan. Falling short on spending reforms while hiking taxes on Illinois’ poor and disadvantaged is not a winning combination.”

An Open Letter to the Illinois General Assembly: Oppose Cigarette Tax Hikes!
The National Taxpayers Union’s open letter on behalf of 14,000 Illinoisans to the legislature explains why a cigarette tax will not solve the state’s overspending problem. “Last year, Illinois passed a multi-billion-dollar tax increase that had devastating effects on the state economy but did little to dent the budget deficit, which now totals over $8 billion,” the letter notes.

Five Things to Consider Before Raising Tobacco Taxes: A Review of the Research
Heartland Institute Vice President Eli Lehrer argues, “Tax increases above current levels are not justified by appealing to the costs that smokers impose on nonsmokers. Smokers already pay more than this measure could justify.”

Research & Commentary: The Best and Worst Ways to Eliminate a Budget Deficit
Heartland Institute Government Relations Director John Nothdurft identifies some of the best and worst ways states are using to trim their budget deficits.

Ten Principles of State Fiscal Policy
This Heartland Institute booklet provides policymakers and civic and business leaders with a highly condensed yet easy-to-read guide to state fiscal policy matters. It presents the 10 most important principles of sound fiscal policy, from “Above all else: Keep taxes low,” to “Protect state employees from politics.”

Nothing in this document is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartland Institute’s Web site at and PolicyBot, Heartland’s free online research database.

If you have any questions about this issue or The Heartland Institute, contact Heartland Government Relations Director John Nothdurft at 312/377-4000 or [email protected].