Illinois cigarette tax hike falls $130M short of projected revenues

Remember when the state of Illinois said its new $1 cigarette tax would bring in $350 million in additional revenue? Unless this tax garners an additional $138 million in the next 10 days, these lofty projections are about to crash and burn. The cigarette tax hike, which took effect a year ago this month, is...

Remember when the state of Illinois said its new $1 cigarette tax would bring in $350 million in additional revenue?

Unless this tax garners an additional $138 million in the next 10 days, these lofty projections are about to crash and burn.

The cigarette tax hike, which took effect a year ago this month, is only on track to bring in $212 million in revenue for the current fiscal year that ends June 30, according to a report from the Commission on Government Forecasting and Accountability, or COGFA.

COGFA chalks up this shortfall, in part, to the decline in sales that typically follows a significant tax increase.

“Another reason for the failure to meet projections is that consumers stocked up prior to the tax increase in 2012 to take advantage of the lower prices,” Jim Muschinske, COGFA’s revenue manager, said to the State-Journal Register.

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.

What’s more, tobacco tax hikes hit the poor hard. According to the Heartland Institute, “Not only are lower-income earners more likely to smoke, they also smoke more frequently. They bear more of the tax burden than higher-income earners, in absolute terms and as a percentage of income.”

It’s time for Illinois to figure out the state can’t tax its way to prosperity.