Recreation Taxes – Increase City Portion of Cigarette Tax

 Revenue: $3.1 million

The City currently levies a $.68 tax on every pack of cigarettes sold within the City.  Cook County and the State of Illinois also impose respective per-pack taxes of $2.00 and $.98 on cigarette packs sold in the City.[1]

Under this option, the City would increase its per-pack tax to an even $1 (a 47 percent increase).

In 2010, the City raised $19.3 million through the cigarette tax.  Assuming the number of cigarette packs sold in the City remained the same after the tax increase, the $1 per-pack tax would yield $9.1 million in additional revenue annually.  However, the cigarette tax increase would likely not generate as much as $9.1 million because the higher price of cigarettes would encourage people to purchase cigarettes outside the City and might, over time, reduce the number of smokers in the City.  In fact, over the last several years, City cigarette tax revenues have already declined in conjunction with increases in the City’s cigarette tax rate.  The chart below shows the changes in cigarette tax revenue and the tax rate from 2004 to 2010.

2004

2005

2006

2007

2008

2009

2010

Cigarette Tax Revenue (in millions)

$15.6

$27.5

$32.9

$28.4

$24.3

$21.0

$19.3

Tax Rate per pack

0.16

0.48

0.68

0.68

0.68

0.68

0.68

Packs Sold

97,500,000

57,291,667

48,382,353

41,764,706

35,735,294

30,882,353

28,382,353

% Change in Tax Rate

200.00%

41.67%

0.00%

0.00%

0.00%

0.00%

% Change in packs sold

-41.24%

-15.55%

-13.68%

-14.44%

-13.58%

-8.10%

Note: Packs sold figure is computed based on dividing the revenue by the tax rate.

Sources: 2009 and 2011 Budget Overview and Estimates. pgs. 110 and 108 respectively and FMPS for the 2010 figure.

As the chart shows, after a 200 percent increase in the tax rate in 2005, the number of packs sold dropped by over 41 percent. In 2006, the number of packs sold decreased 16 percent following a 42 percent increase in the tax rate.  In the following years, the number of packs sold continued to decrease by an average of 12 percent, even as the tax rate held steady.

Based on this revenue history, a $0.32 increase in the tax rate would likely result in a decrease in the number of packs sold in the City.  Assuming that the number of packs sold continues to decrease at the present 12 percent rate, we assume that 21.8 million cigarette packs will be sold in the City in 2012, which corresponds to $14.8 million in revenue.  We also assume that a 47 percent increase in the tax rate will result in an 18 percent decline in packs sold, mirroring the decline in packs sold that occurred after the 2006 tax increase.[2]  Such a decline would reduce the number of packs sold to 17.9 million but would translate to $17.9 million in revenue at the new $1 per-pack tax rate.  The tax increase would amount to an overall $3.1 million increase in cigarette tax revenue.[3]

Proponents might note that studies show that higher cigarette taxes reduce smoking, with a larger impact on younger smokers.[4]  If an increase in the tax rate causes a reduction in smoking, this may decrease public (and private) healthcare costs.

 

Opponents might argue that increasing the tax would simply cause smokers to purchase cigarettes on the Internet or in lower tax jurisdictions such as Indiana.[5]  This would have a negative impact on the many small merchants who sell cigarettes in the City.  Increasing the tax rate would also make city cigarette tax fraud more likely, thus resulting in less revenue for the City.

 

Discussion and Additional Questions

  • What would the City’s goal be in implementing this increased tax? Increased revenue or reducing the incidence of smoking?  Or both?

 Budget Details

Fund: Corporate Fund, 0100 Type of Revenue:  Municipal Cigarette Tax
This appropriation can be found on page 16 of the 2011 Annual Appropriation Ordinance.

http://www.cityofchicago.org/content/dam/city/depts/obm/supp_info/2011BudgetOrdinance.pdf

 


[1] Campaign for Tobacco-Free Kids. “Top Combined State-Local Cigarette Taxes.” http://www.tobaccofreekids.org/research/factsheets/pdf/0267.pdf

[2] This comparison is known in economics as the price elasticity of demand. It is used in economics to show “the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price.”

http://en.wikipedia.org/wiki/Price_elasticity_of_demand

[3] While this is less revenue than was raised in 2010, we assume that the decline in revenue will continue and that in 2012 the tax will generate $14.8 million if no change in the tax rate is made.  Thus, we use the $14.8 million figure as the point of comparison.

[4] Carpenter, Christopher and Cook, Philip J. “Cigarette taxes and youth smoking: New evidence from national, state, and local Youth Risk Surveys.” December 2007.

http://ksu.edu.sa/sites/KSUArabic/Research/ncys/Documents/333.pdf

[5] Merriman, David. “The Micro-Geography of Tax Avoidance: Evidence from Littered Cigarette Packs in Chicago.” American Economic Journal: Economic Policy. Volume 2, Number 2, May 2010.