Illinois Raises Cigarette Taxes, Chicago’s Rate Now Second Highest in Nation

Cigarette smokers in Chicago had better stock up now, because on June 24, the excise tax on cigarettes in Illinois will increase by a dollar, leaving Chicago with the second-highest excise tax on cigarettes in the country. At the state level, this will make the excise tax $1.98 per pack, but after adding in local taxes, the combined rate in Chicago will be $4.66, which is second only to New York City, which has a rate of $5.85 per pack.

Cigarette taxes are often raised when states are in dire fiscal straits, and Illinois certainly fit this bill. In 2010, the state had a deficit of $13 billion, and in 2011, the state approved an increase in the individual income tax rate from 3 percent to 5 percent, as well as an increase in the corporate rate from 7.3 to 9.5 percent. In the months that followed, many businesses in the state left in response to the increases or threatened to do so unless they were given special carve outs. I was in a conversation in the halls of our office a few minutes ago with my colleagues Joe Henchman and Scott Hodge, and we were trying to decide which state was in more of a downward spiral, California or Illinois.

So now that income and corporate taxes have been raised to capacity, Illinois has opted to “tax that fellow behind the tree,” and go after unpopular groups like smokers to shoulder the burden of government expenses.

Proponents of tobacco taxes generally claim that increased taxes will reduce sales of tobacco products. This is true. In fact, the idea that raising the price of something will make people do less of it is actually so well respected that economists call it the “law of demand.”

However, taxes on cigarettes have several unintended consequences that make them undesirable. A 1996 study found that increases in tobacco taxes led consumers to buy cigarettes with more tar and nicotine, or led them to smoke cigarettes more intensely.

But one of the most serious and often overlooked problems with tobacco excise taxes is that disparate tax rates between states result in large quantities of cigarettes being smuggled from low tax states to high tax states. In 2010, 51 percent of all cigarettes consumed in Arizona were smuggled in from other states. A reporter from Chicago estimates that under Illinois’ new tax rate, black market cigarettes would account for 24 percent of Illinois’ cigarette consumption.

This is not hard to believe. By my back of the envelope calculations, I could make $6000 in an afternoon if I loaded up the trunk of my Chevy Impala with cartons of cigarettes purchased in Indiana (where packs are $5.50) and drove them to Chicago to sell them there.

In some places, smuggling has even spurred violent crime. In 2002, armed robbers held up a cigarette distribution center and made away with more than $1 million in cigarettes and government tax stamps.

Further, black market vendors don’t generally ask for proper identification, so if the goal is to keep cigarettes out of the hands of children, cigarette taxes are a roundabout way to get there.

More on Illinois here.

Follow Scott Drenkard on Twitter @ScottDrenkard.