As the country slipped into the Great Recession in 2008, state tax revenues have sharply declined. For many lawmakers raising taxes on smokers seemed the obvious choice. Not only would a higher rate generate a supposed revenue boon, higher cigarette prices would encourage people to kick the habit. But as with any policy, a cigarette tax hike produces many unintended consequences.
From 2007 through 2009, 22 states hiked their cigarette taxes. Tobacco state South Carolina and five other states followed suit in 2010. Now Illinois is poised to jump on the bandwagon with a tax package that includes hiking cigarette taxes by a buck. The package is expected to be voted on in the House today and already has strong support from Senate President John Cullerton, D-Chicago. Supporters hope outgoing “lame duck” lawmakers will back an increase because they won’t have to face voters in 2012.
The hike represents a 102% price increase per pack. Cook County smokers alone would see the price go well over $10, prompting many to go to adjoining states and counties with lower rates. Neighboring Missouri, with its far lower 17 cent rate, is sure to attract them.
Evidence of this occurring in other states abounds. For example, when New York increased its cigarette tax by $1.60 in June 2010 it brought the average price per pack to $9.20 state-wide, and a whopping $11 per pack in the city. Looked for cheaper way to light up Pennsylvania was their hot spot, where a generic pack of 20 costs nearly the same as the new $4.35 New York rate. Data from the Pennsylvania Department of Revenue show that from September 2009 to September 2010 the state saw its cigarette tax revenue increase by nearly 60 percent, while New York tax collections remained stagnant or falling. Missouri is likely to experience a similar revenue windfall.
A recent report released by the Michigan-based Mackinac Center for Public Policy attempts to quantify the amount of cigarette smuggled into states. Comparing legal per capita sales of cigarettes to survey data on the percentage of smokers in each state they determined that states with higher taxes have more inbound smuggling. No surprise New York ranks among the top five smuggling destination states at 47.4 percent of the state’s total consumption.
Counterfeiting and violence result as individuals profit in a newly created underground tobacco market. Willing to break the law, individuals engage in hijacking, theft, and destruction of property to ship and sell contraband cigarettes in high tax states. The report projects that a $1.00 tax hike will increase total smuggling in Illinois to 26.3 percent of total cigarette consumption, up from just 5.9 percent in 2009.
Many supporters of these taxes confuse declines in cigarette sales following a tax hike with people kicking the habit. They assume a 20 percent drop in sales means 20 percent of people no longer smoke. Data shows this is not the case. High cigarette taxes increase smuggling, create dangerous black markets, and deplete state coffers of revenue.