Bad Santa: Illinois’ ‘sin taxes’ among the highest in the country

Despite diminishing returns, the Prairie State has yet to kick its excise tax habit.

After another year straining under one of the heaviest tax burdens in the nation ­– compounded this July by the passage of a state budget that included a record permanent income tax hike – Illinoisans are likely looking forward to decompressing this holiday season.

But if that involves indulging in a vice, Illinoisans should be aware that they won’t escape the squeeze of high tax rates so easily.

A September study from the nonpartisan Tax Foundation ranked Illinois’ per capita excise taxes, which the Tax Foundation defines as “sales and other special taxes imposed on select items,” ranked eighth-highest in the country in fiscal year 2014.

Excise taxes that apply to products such as alcohol and tobacco have traditionally been known as “sin taxes.”

In fiscal year 2014, Illinois reaped approximately $774 per capita in state and local excise taxes. This exceeded each of Illinois’ neighbors by at least $100 per capita.

The report, based on data from the U.S. Census Bureau notes, “Some excise taxes are fairly well-known to the public, like cigarette or alcohol taxes, but others are more hidden, like taxes on admissions for amusement businesses.” Illinois’ largest city passed a budget for fiscal year 2018 in November that included an “amusement tax” increase to 9 percent from 5 percent for admissions to performance venues with a capacity of 1,500 or more. The tax for tickets to smaller venues was eliminated.

Excise taxes are often introduced to both raise revenues and discourage undesirable behavior (as determined by the taxing authority). But as the Tax Foundation pointed out, these two objectives are at odds with each other. Simply put, if a tax is imposed to eliminate or curtail an activity, revenues from a tax attached to that activity or product should decline.

Take cigarettes, for example. Tax Foundation research on cigarette tax revenue shows that while governments do tend to reap modest revenue gains from excise tax hikes in the short term, this drops off over time, which makes excise taxes unreliable as a revenue source.

Inflation-adjusted net collections from cigarette taxes, for example, have demonstrated a pattern of brief revenue spikes immediately following tax increases, succeeded by significant dips. As tobacco use has been in decline since the 1960s, relying on the tax for revenue will likely yield disappointing results.

In addition, exorbitant cigarette tax hikes can provoke residents to vote with their feet, and opt for the friendlier prices of nearby states. The development of a black market in the heavily taxed goods can also impede state revenues, as “smugglers are inclined to buy cigarettes in low-tax jurisdictions to resell them in high tax jurisdictions for profit,” according to the Tax Foundation.

Data from the Illinois Department of Revenue show gains from the Prairie State’s 2012 cigarette tax hike fell far short of projections.

Alcohol is another product often singled out for higher taxation. The destructive consequences of alcoholism and the dangers from driving under the influence are widely recognized, and policymakers have justified alcohol taxes in part as a way to discourage overindulgence. But researchers at the Urban Institute and Brookings Institution’s Tax Policy Center found that, despite Illinois’ statewide alcohol taxes in 1999 and 2009, the levy had no significant impact on drunk driving fatalities.

Moreover, excise taxes are largely regressive. Combined federal, state and local excise and sales taxes in Chicago, Illinois’ largest city, can amount to 28 percent of the cost of liquor. While steep excise taxes might not affect the well-heeled much, lower-income households suffer under the higher costs.

The regressive nature of “sin taxes” has proved true with soda taxes, according to the Tax Foundation. But that didn’t stop Illinois’ most populous county from imposing a soda tax on taxpayers while claiming public health benefits. After a taxpayer backlash, the tax was ultimately repealed.

Taxing Illinois’ consumption preferences has done little to pull the state out of its fiscal crises. Rather than confronting the sources of the state’s mounting debts, Springfield politicians repeatedly opt for costly borrowing and feckless tax hikes to score a temporary fix. In the new year, lawmakers should resolve to break these bad habits.