Illinois cigarette tax money goes up in smoke
Illinois’ high cigarette tax is a flighty source of revenue with unintended consequences.
Since Illinois taxes on cigarettes doubled in fiscal year 2013, cigarette tax revenues have fallen short of the state government’s expectations.
The 2016 report of collections from the Illinois Department of Revenue reveals cigarette taxes brought the state about $807 million in fiscal year 2016, about $123 million less than the state anticipated it would make when it implemented the cigarette tax hike.
When state lawmakers raised the state cigarette tax to $1.98 from $0.98 on May 29, 2012, they estimated it would generate an additional $350 million of annual revenue, which then-Gov. Pat Quinn argued was necessary to save the state’s Medicaid program from collapse.
The first year the tax took effect, fiscal year 2013, saw an increase of about $233 million. Cigarette tax revenues increased marginally for fiscal years 2014 and 2015 before plummeting in fiscal year 2016.
Taxes on tobacco products besides cigarettes, such as smokeless tobacco and cigars, have been relatively more consistent in their revenue generation, bringing in about $37 million a year since fiscal year 2014.
When “sin” taxes, such as those on cigarettes, bring in less revenue than anticipated it means consumers have responded more significantly than policymakers predicted. The state did not fully understand just how responsive residents would be to higher cigarette prices, and many residents are leaving the Illinois cigarette market altogether rather than giving the state more cash.
Some of these deserters quit smoking altogether. According to the most recent data available from the Illinois Department of Public Health, the percentage of Illinois adults who smoked in 2012 was 18.6 percent, a number that decreased to 15.1 percent by 2015. But the national smoking rate decreased to 15 percent from 18 percent in the same period, meaning Illinois’ smoking rate decreased just half a percentage point more than the national average. At best, the tax hike could be said to have a marginal impact on influencing smokers to quit.
Other smokers find ways to get their cigarettes without paying higher prices. Illinois consumers have long been known for purchasing items in other states, such as fireworks. When Chicago hiked the legal tobacco usage age in 2016 to 21 from 18, Indiana businesses prepared for an influx of out-of-state demand. Likewise, disproportionately high cigarette taxes send smokers across the border, which means the state does not earn revenue and cigarettes are still used.
Indiana is not the only tax sanctuary for smokers. Missouri embraced more Illinois customers immediately following the cigarette tax hike and Kentucky’s tax rate is only 60 cents per pack. Illinois’ cigarette tax hike pushed it higher than Iowa’s rate of $1.36 a pack.
This may be why the four Senate Democrats who opposed the 2012 cigarette tax hike primarily had constituents residing near the border.
Even if a smoker is not near a state border, someone else can make the trip. Research from the nonpartisan Mackinac Center for Public Policy concludes cigarette taxes encourage smuggling. An unscrupulous individual can go to a state with cheaper cigarette prices, purchase cigarettes in bulk, and travel to non-border counties and sell cigarettes there. The smuggler can charge more than what cigarettes cost in Indiana but less than what smokers would have to pay in Illinois. Both parties leave happier. Although this sale is illegal and functions as a black market activity, the practice is incentivized under current tax law. In this scenario, revenue does not go to the state, smokers don’t stop smoking, and productivity is diverted to the black market.
In some cases, higher taxes on cigarettes may actually further harm the health of smokers. Research indicates higher prices encourage people to desire more “bang for their buck.” In the case of cigarettes, smokers will desire more nicotine in each cigarette they smoke. They can satisfy this desire by “rolling” their own cigarettes with loose tobacco. These cigarettes will have no filter and cause the smoker to take in more nicotine than a typical cigarette.
Some proponents of the cigarette tax may observe all these unintended consequences and still support a hike so long as some people stop smoking and the state gets some revenue. But cigarette taxes’ inability to match projected revenues should be taken more seriously. When revenue projections are not met, government officials expecting that funding must find other sources of money. The National Taxpayers Union found tobacco tax hikes were followed by other tax hikes in 70 percent of reviewed cases. In time, a cigarette tax hike will generally force higher taxes on more taxpayers.
Illinois policymakers should acknowledge the unintended consequences of their proposals, and refrain from penalizing residents for taxes that fail to live up to the hype.