Chicago Cigarette Tax Hike Opens Door to Real Vice

Chicago Cigarette Tax Hike Opens Door to Real Vice
June 1, 2004

The controversial Cook County, Illinois cigarette tax hike went into effect on May 1, pushing the price of a pack of smokes in Chicago to $6. Only New Yorkers pay more.

The tax hike might also mean Chicago follows New York's lead in other ways. If the Big Apple's experience is any indicator, Chicago can expect to see an invigorated black market for cigarettes, an increase in the crime and menace that come with black markets, and a growing presence of international terrorist organizations that fund themselves with bootlegged cigarettes.

And, as is always the case with so-called "sin" taxes, Cook County's new cigarette tax will hurt poor Chicagoans the most.

Black Markets and Terrorism

For 50 years, New York City has levied the highest tobacco taxes in the country. And for 50 years, it has battled the unintended consequences. In a policy study published last year by the Cato Institute, Patrick Fleenor documented the results of the Big Apple's half-century experience with tobacco taxes.

Each time the city raised its cigarette tax, sales of cigarettes dropped in the city but skyrocketed in jurisdictions around the city, where taxes were lower. At the same time, law enforcement uncovered more cigarette bootlegging operations, most run by organized crime syndicates. In 1989, city tax official Robert Shepherd told a gathering of tax administrators that in New York City, "It is literally more profitable to hijack a cigarette delivery truck than an armored truck."

New York City's cigarette black market has aided international terrorist organizations and other nefarious elements, including the Russian mafia, Chinatown gangs, the Irish Republican Army, Hezbollah, and al-Qaida. In 2002, Hezbollah ringleader Mohammad Youssef Hammoud was arrested in Charlotte, North Carolina for operating a smuggling ring that purchased low-tax cigarettes in North Carolina and sold them on the black market in high-tax Michigan. Just one van of cigarettes could net as much as $10,000 for the terrorist group.

In London--one of the few cities in the world where cigarette taxes are higher than they are in New York--the Irish Republican Army uses smuggling to help fund its operations. Sweden and Canada have reduced their cigarette taxes after determining the harm wrought by black markets outweighed the generated revenue or costs saved by people persuaded by the tax to quit smoking.

The day after the Cook County cigarette tax hike took effect, the Associated Press reported cigarette retailers in nearby Northwest Indiana saw a surge in sales. Indiana's tobacco taxes are 45 percent lower than they are in Chicago, and Indiana retailers say they expect a windfall.

Much of the sales growth experienced by Indiana retailers will likely come from Chicago smokers willing to drive across the border to stock up. But it would be naive to think a portion of new sales wouldn't go to bootleggers motivated by increased profit margins.

The Trouble with Sin Taxes

Sin taxes are popular with politicians primarily because they generate revenue. At the same time, politicians can claim that revenue with a certain moral rectitude, because it's generated by behavior many people find undesirable. Politically, it's a great deal easier to sell a tax on bad habits than to increase taxes on hard-earned income.

But sin taxers stand on a very shaky moral high ground, because these taxes are terribly regressive. Not only are the poor more likely to smoke, but they spend a far greater percentage of their income on tobacco when they do.

A 2001 report by the Congressional Budget Office confirmed tobacco taxes encourage people to quit smoking--but those most likely to quit tend to be from middle- and upper-income households. Unlike the poor, the affluent can afford to experiment with anti-smoking programs, can more easily substitute another source of pleasure for tobacco, or generally are less likely to take solace in a cigarette.

That means an already regressive tax grows more regressive over time, as more middle- and upper-income people quit, while lower-income people continue to smoke. Meanwhile, government grows as dependent on the sin tax's revenue as taxpayers are dependent on the sin.


Radley Balko is a policy analyst at the Cato Institute. His email address is rbalko@cato.org.

For more information ...

Patrick Fleenor's February 2003 Policy Analysis, "Cigarette Taxes, Black Markets, and Crime: Lessons from New York's 50-Year Losing Battle," is available at the Cato Institute Web site at http://www.cato.org/pubs/pas/pa468.pdf.

The Congressional Budget Offices's February 2001 Budget Options report is available online at http://www.cbo.gov/bo2001/bo2001_showhit1.cfm?index=REV-49.