Wednesday, April 15, 2009

The effect of those high cigarette taxes

As I've written in previous posts, the sale of cigarettes is a crucial revenue source for convenience stores and gas stations, such as the Morton Grove Shell station pictured on the left.

And we all know--because we're reminded about this fact on a daily basis by politicians on both sides of the aisle--small businesses are the driving force of our economy.

AP takes a look at the issue:

One of Bill McCloskey's gas stations used to sell 110,000 packs of cigarettes a month before a $2 Cook County (Illinois) sales tax kicked in three years ago. Now it sells 17,000.

Then the cost went up again, thanks to a 62-cent federal tobacco tax increase April 1. That's dropped McCloskey's cigarette sales another 12 percent from last April.

Now, with a pack of smokes topping $9 in at least one city, state lawmakers are considering another tax hike of $1 over two years.

Advocates say it could raise nearly $1 billion for health care and reduce the number of smokers, thus decreasing the state's health services burden. But others say cigarette prices already are too high and people wanting a puff will travel across state lines to get it.

Or smokers will quit. Especially in Illinois, because the state Senate--with no Republican support--passed a bill that will add 50 cents a pack on top of all those taxes, followed by a second 50 cent levy a year later. The state already taxes cigarettes at 98 cents a pack.

When smokers kick the habit--or when they travel to other jurisdictions to buy cigarettes--it means less tax revenue. But the targeted programs remain. Who will make up the shortfall in funds?


The recent history of tobacco taxes is that revenue forecasts are overly optimistic.

Related posts:

Marathon Pundit attacks higher cigarette taxes

SCHIP cigarette tax kicks in, Illinois considering add'l $1 a pack increase

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Matthew Mulligan said...

Colorado has tried this as well. A recent $1.00 per pack tax was instituted to pay for smokers treatment programs. Surprise! cigarette tax revenue fell through the floor. Colorado Democrats are now trying to tax something else.

Unknown said...

This is nonsense. Non-smokers carry the burden of a tobacco tax? Now I've heard it all. It's a shame, because your logic was good. Tobacco taxes, when disparate across jurisdictions do result trade distortions as smokers seek the lower-tax pack. Your conclusion was just sub-par however.

The solution is to revoke the tax-exempt status of Reservations, and ensure that taxes are primarily increased federally. Then monitor tax rates in Canada and Mexico to make sure you're roughly in-line, and thing should work-out just fine. (Yes there could be overseas smuggling, but are people really going to go through that trouble with cigarettes when cocaine is so much more profitable?)