From the Illinois Alliance for Growth
Lawmakers Should Consider Downstream Economic Impact on Border Communities; Jobs
(Springfield, Ill.) Don't tax me, don't tax thee...tax that man behind the tree has risen to the level of a colloquialism when used by opponents of cigarette tax hikes. It's an informal way of saying that going after smokers is the majority picking on the minority. A quick google search of the phrase will prove the point.
A poll earlier this month conducted on behalf of Illinois anti-smoking groups unsurprisingly found that 74 percent of Illinois respondents when choosing which tax to hike, picked tobacco taxes as the overwhelming favorite. Given that only about 20 percent of the population smokes, it's no wonder. Smokers are that man behind the tree.
Of course just because you point at the man behind the tree, that doesn't me you too won't be affected.
Proponents of ever higher cigarette taxes are selling it both as an incentive to quit smoking and as a way for the state to grab a quick buck -- or 300 million of them -- for state coffers. It's a shopworn argument that you can both reduce the amount smokers and raise money at the same time.
The problem of using the cigarette tax to fund growing programs is that as tax rates rise smokers quit and the state receives less revenue. Even at the current rate cigarette taxes are a declining, unpredictable revenue source. From 2005 to 2006 Illinois' cigarette tax revenue declined by $147 million.
The argument that $300 million will be raised is also questionable, because evidence suggests that revenue estimates on tobacco taxes have become unreliable. Across the nation from Fiscal Year 2003 to Fiscal 2007 cigarette taxes were raised fifty seven times, yet only in sixteen instances was the predicted increase by state officials met or exceeded. So if we raise taxes and the resulting revenue is less than predicted, where do we go next year to find the lost revenue? And those revenue shortfalls can be large.
When New Jersey raised its cigarette prices above those prices in surrounding states in 2004, their revenues plummeted by 67 percent. Neighboring states, however, prospered from all those New Jersey residents crossing the border to buy cigarettes and other sundry items one purchases at convenience stores.
If a dollar increase in taxes were passed, the average cost of a pack cigarettes would rise to $7.26 across most of Illinois. In Cook County and the City of Chicago the price would rise to nearly $10 per pack.
It isn't just that those living on the border would drive 25 miles or so for their purchases. Everyone agrees that happens. Nor is that just the poor and minorities end up shouldering the additional tax burden because they demographically are more likely to smoke. It's the effect on commerce at the stores on Illinois' borders that will lose business that needs to be addressed.
The owners and employees of these facilities, chances are, don't smoke. But the lost revenue on purchases of other items and their increased tax and compliance burden will impact their profitability and employment levels.
These downstream impacts are real. The Congressional Joint Committee on Taxation (JCT) found that, "because smokers are paying more in aggregate to smoke, they consumer less of other goods and services in the economy. This implies that incomes of producers and workers in other sectors will decline."
In fact in an October 2007 JCT study on modeling the federal revenue effects of proposed hikes on cigarette taxes, JCT reduced gross cigarette tax revenues by 25 percent to account for decreases in income and payroll tax revenues.
At the end of the day, don't tax me, don't tax thee but tax that man behind the tree doesn't work as imagined. Taxing that man behind the tree creates effects throughout the economy that in turn influence state finances. Individuals who don't smoke will still feel the effects of a cigarette tax increase while the state isn't likely to raise the money they had hoped.
Poll respondents, of course, aren't expected to think of the downstream effects of one tax position or another. They are simply given a list of preferences and they make a pick. Lawmakers, on the other hand, are expected to understand the implications of their acts not act on mere preferences. Under our system of government that's why they are elected.
It's also why we don't govern by polls.
Greg Blankenship is President of the Illinois Alliance for Growth.