By Ben VanMetre -
Chicago Mayor Rahm Emanuel plans to increase the cigarette tax in Chicago by 75 cents per pack. The tax hike would increase the per-pack total to $7.42 — making Chicago the most expensive city in the nation in which to buy a pack of cigarettes.
This tax hike is one of the plans Emanuel is considering to help close Chicago’s $338.7 million budget gap next year. City officials project that the budget deficit could grow to more than $1.53 billion in 2016.
The cigarette tax hike is expected to bring in $10 million – roughly 3 percent of the city’s expected budget hole next year. But revenue estimates for cigarette tax hikes are notorious for being inflated.
Illinois’ recent $1 per-pack tax increase on cigarettes was supposed to bring in $350 million in additional revenue. The actual revenue collected from that tax hike was on track to come up roughly $138 million shy of those projections last fiscal year.
The Illinois Policy Institute has previously highlighted why hiking taxes on cigarettes to pay for out-of-control spending is bad public policy:
- Raising cigarette taxes rarely brings in as much revenue as predicted. An analysis of 57 state tobacco excise tax increases found that 72 percent of the tax hikes failed to bring in the expected revenue. In some cases, revenues actually decreased. New Jersey, for example, raised its cigarette excise tax by 17.5 cents in 2006, expecting to raise an additional $30 million. But the state’s tobacco revenues actually fell by $24 million.
- Raising taxes encourages greater tax avoidance. Illinois has one of the highest per-pack tobacco taxes in the region. That gives consumers strong incentives to travel to neighboring states where they can save $1 per pack or more.
- Raising taxes encourages commercial smuggling rings. A study by the nonpartisan Mackinac Center for Public Policy found that if Illinois were to increase its cigarette taxes by $1 per pack, tobacco smuggled into the state would account for 26.3 percent of total cigarette consumption (compared to only 5.9 percent, today).
- State taxpayers will be on the hook when tobacco revenues fall short. Tobacco taxes are notoriously unreliable sources of state revenues. And, as noted above, tobacco tax hikes rarely bring in the revenue expected or needed to sustain growing social programs. So what happens when the tobacco tax hikes don’t generate the revenue needed? A study by the National Taxpayers Union found that 70 percent of tobacco tax hikes were followed by other state tax increases within two years.
Chicago doesn’t need higher taxes. The city’s finances are already on the brink of collapse. Each Chicago household is on the hook for more than $84,000 in debt and unfunded liabilities from the city of Chicago and its sister governments. And people are leaving the city in droves – Chicago lost 200,000 residents during the last decade. A sustainable future for Chicago will depend on comprehensive budget reform – not higher taxes.