CIGARETTE TAXES—IMPACT

By DWIGHT R. LEE
Professor of Economics, University of Georgia

As you are surely aware. Governor Thompson has proposed an 8 cent per pack increase in the state cigarette excise tax on top of the 10 cent per pack increase added just last year. A further increase in this tax is ill advised, particularly from the perspective of local governments in Illinois. Yet another increase in the Illinois cigarette excise tax will do little to reduce the number of cigarettes smoked by the citizens of Illinois, but will do much to reduce the number of cigarettes bought from Illinois merchants. Local merchants will be burdened with unnecessary losses in the sales of one of their most important products, and local governments will be burdened with losses in their tax revenues.

If the Governor's proposal is enacted, the Illinois cigarette excise tax will be 38 cents a pack, and Illinois and Minnesota will be tied with the second highest cigarette tax in the nation. More importantly, the proposed increase would result in a cigarette excise tax in Illinois that is $3.50 per carton higher than in Kentucky, $2.50 per carton higher than in Missouri, and $2.25 per carton higher than in Indiana. Price differences of these magnitudes would accelerate the trend in the cross-border purchase of cigarettes by smokers in Illinois.

It is already the case that Illinois smokers are purchasing many of their cigarettes from outside the state in order to avoid high state taxes. This is an acute problem in Chicago and Cook County where, with city and county cigarette excise taxes, cigarettes cost in excess of $4.00 per carton more than they do in Indiana and Missouri. Couple this price difference with the fact that 66 percent of the State's population is concentrated in 7 counties which are only short driving distances from either Indiana or Missouri, and it is not surprising that the research firm Price Waterhouse has estimated that Illinois merchants are currently losing 21 percent of their cigarette sales to out-of-state merchants. The estimate by Price Waterhouse is that it the proposed increase in the excise tax of 8 cents goes into effect, the merchants of Illinois will lose over 26 percent of their cigarette sales to merchants in other states. This represents a total of over $318 million in cigarette sales lost to Illinois merchants.

When local merchants lose cigarette sales, all local governments lose sales tax revenues and some local governments lose excise tax revenues. It is estimated that the loss in state sales tax revenues (which are shared with the local governments) that will result from the proposed 8 cent excise tax increase will come to over $5.1 million. The direct loss to local governments will vary depending on the size of their local sales and excise taxes. Looking at just the loss in local excise tax revenues from the proposed state increase of 8 cents per pack, it is estimated (again by Price Waterhouse) that Cook County will lose over $3 million and Chicago will lose over $2.7 million.

It should also be emphasized that when taxes drive cigarette sales to other states, they also drive out sales of sundry products which are sold in association with cigarettes. The sales tax losses from the cross border purchases of these products adds to the negative impact the proposed excise tax increase will have on local tax revenues.

The unfortunate fact is that local governments in Illinois, and our Illinois merchants, are in competition with governments and merchants in other states. The high state excise tax on cigarettes, coupled with a state sales tax that is higher than that of nearby states, has already put your government and its citizens at a decided disadvantage in this competition. The Governor's proposed increase in the state cigarette excise tax would increase that disadvantage significantly. The interest of the merchants and taxpayers in your community would be well served if the State reduced the cigarette excise tax, bringing it more in line with that of adjacent states. At the very minimum you should register your strong opposition to yet another increase in the state cigarette excise tax. •

May 1990 / Illinois Municipal Review / Page 19