Quinn's cigarette tax and its likely revenue shortfall

More ammunition against Illinois Governor Pat Quinn's Medicaid funding proposal and his plan to hike cigarette taxes by one dollar comes this way from The Daily.

But if previous experiences with state smoking taxes are any indication, it won't work. In his February budget address, Quinn was blunt with state lawmakers. "Our rendezvous with reality has arrived," he said. He declared his intention to pass a $2.7 billion reform to the state’s Medicaid system. Quinn's proposal, released in April, included a variety of cuts and payment reductions, as well a $1-per-pack cigarette tax that his office said would raise an estimated $337.5 million directly.

Sadly, the governor does not seem as eager to meet with fiscal reality as he claims: That revenue estimate from the smoking tax is almost certainly inflated. The anti-smoking advocacy group Campaign for Tobacco Free Kids recently estimated that a $1 increase in the state smoking tax would raise a little less than $300 million — leaving the governor's office at least $37 million short. But even those numbers probably overstate the tax's actual revenue potential since cigarette taxes consistently produce less money for state coffers than expected. Between 2003 and 2007, states raised cigarette taxes 57 times. But according to the National Taxpayers Union, only 16 of those hikes met revenue projections.

There are two main reasons why cigarette taxes don't bring in the bucks their supporters promise. The first is that higher taxes encourage smuggling from nearby low-tax states. Minnesota, for example, has been ratcheting up its cigarette tax for decades — and now has one of the highest rates of cigarette smuggling in the country, according to the state's Department of Revenue. And after New York City hiked its cigarette tax by $1.42 per pack in 2002, a report by the city's Independent Budget Office found that more than a quarter of the city’s smokers were avoiding the cigarette taxes. (Tax evasion cost the city an estimated $40 million in 2006.) This is a nationwide problem: Estimates indicate that states lose an estimated $5 billion tax revenue to tobacco smuggling each year.

The second issue is that smoking rates are falling rapidly — and revenues from taxes based on cigarette sales are thus in decline as well. In 2009, for example, California saw an 8.1 percent drop in smoking rates, and a concurring $74 million decline in cigarette tax revenue. One might think that would be unalloyed good news for public health advocates — except that California funds a variety of public health programs, including breast cancer research, with revenue generated by cigarette taxes.

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