Chicago Mayor Rahm Emanuel Proposes Highest Cigarette Tax in Nation
In an effort to close Chicago’s projected $339 budget shortfall next year, Mayor Rahm Emanuel has proposed increasing the city’s cigarette tax by 75 cents per pack. This would make Chicago the most expensive place in the nation to purchase cigarettes, where the total tax per pack will rise to $7.42.
While the Emanuel administration claims that the tax hike would generate roughly $10 million for vision care for low-income students in public schools, countless examples demonstrate that raising taxes on tobacco does not necessarily generate more revenue.
In 2006, Chicago collected $32.9 million in cigarette taxes. After two consecutive tax hikes, revenue fell to $16.5 million this year. Carrie Austin, chairman of the City Council’s Budget Committee acknowledged this reality, stating, “we’ve run sales away.”
In May of 2012 when Illinois raised the cigarette tax by $1-per-pack, nearly doubling the state’s tax rate to $1.98 per pack, the tax delivered $138 million less than expected. What’s more, local small businesses lost tens of thousands of dollars as a direct result as consumers purchasing tobacco across state lines.
To avoid higher cigarette taxes, consumers constantly demonstrate that they are willing to purchase the products in less expensive markets. This is especially true for Illinois’s highest tobacco tax rival New York. Nearly 21 percent of cigarettes are smuggled into the state as a direct consequence of their absurdly high tobacco taxes. If Chicago’s goal is to compete with New York’s black market for cigarette smuggling, this is a step in a right direction. If however, Chicago politicians are concerned about the resulting theft, violence, and lost revenue, it’s a complete step in the wrong direction.
Tobacco taxes are an extremely volatile revenue source that prompt future tax hikes. Proponents of cigarette taxes neglect economic realities. To argue that a cigarette tax will increase revenues while decreasing the number of people buying cigarettes is absurd. When prices increase, consumption declines, taking revenue with it.
Mayor Emanuel’s proposed tax hike will do little to solve Chicago’s budget woes. It will hurt Chicago small businesses and when tobacco sales fall, resulting in less revenue for the city, Chicago politicians will again be debating what to do about the city’s empty coffers.