Cigarette tax worries sellers
Critics say price increase will send buyers across state lines
February 27, 2005
By KIRSTEN SINGLETON
STATE CAPITOL BUREAU
Critics of a plan to hike the state’s cigarette tax by 75 cents per pack say the increase would hurt Illinois.
They charge that smokers will buy cheaper cigarettes via the Internet or, if they live along the borders, from neighboring states.
In addition, opponents believe a hike fuels the black market for tobacco.
“Bootlegging of cigarettes out of this state and into it would be unbelievable,” said Harry “Bud” Kelley, executive director of the Illinois Association of Tobacco and Candy Distributors.
But Gov. Rod Blagojevich believes the increase, combined with an increase for other tobacco products as well, would raise $150 million needed for health care and roads in an otherwise cash-strapped year.
Spokeswoman Rebecca Rausch said the increase is “win-win” for the state.
“Studies have shown that increasing the taxes could entice current smokers to stop smoking and (keep) kids from starting to smoke,” Rausch said.
At the same time, she said, others will continue to smoke, and the resulting money can fund vital programs in the state.
History supports both the governor and critics’ claims.
Illinois’ current 98-cents-a-pack tax ranks 19th in the country, according to the American Lung Association, and is significantly higher than its bordering states: Wisconsin, 77 cents; Indiana, 55 cents; Kentucky, 3 cents; Missouri, 17 cents; and Iowa, 36 cents.
Increasing Illinois’ tax only encourages people to buy elsewhere, opponents say.
“While they’re over there, they will probably fill up their car with gas, grab some dinner, maybe do some shopping, and that’s all sales tax revenue that Illinois will lose to Indiana, Kentucky, Missouri, Iowa and Wisconsin,” said Cindy Davidsmeyer, spokeswoman for Senate President Emil Jones.
Indeed, in the months after the last increase in the cigarette tax, a 40-cent hike in 2002, cigarette sales brought in less revenue than the state anticipated.
At the time, the 40-cent increase was expected to bring in as much as $230 million in the first fiscal year, which began July 1, 2002.
But cigarette sales slumped, and a deal allowed distributors to stock up on the previous year’s cheaper tax stamps.
According to the Illinois Department of Revenue, the state cigarette and cigarette-use taxes yielded an extra $178 million in the first year, $52 million less than expected.
Rausch said the governor’s $150 million projection is just an estimate. But she believes it is conservative.
Yes, people seek out cheaper cigarettes from the Internet or other states, Rausch said.
But, she added, “People choose convenience over cost, and you’re probably not going to drive 30 or 60 miles away to buy cigarettes when you can just go down the street.”
Revenue from cigarette sales from the last hike does seem to have rebounded.
In Fiscal Year 2004, which ended last June, cigarette taxes brought in $729 million in Illinois, $264 million more than the state brought in the year leading up to the 2002 hike.
Critics and business owners, though, are not convinced.
Charles Bellmire, manages Butts Tobacco in Momence, about 10 minutes away from the Indiana border.
Indiana’s per-pack cigarette tax of 55 cents is far below Illinois’ current tax of 98 cents, and a full $1.18 cheaper than the $1.73 that Gov. Rod Blagojevich is proposing.
That increase, Bellmire said, “would probably put me out of business because I’m too close to Indiana.”
Bellmire said although he operates 45 minutes south of Cook County, he benefits from the Chicago area’s higher rates. Cook County tacks on an additional $1 tax, and the city of Chicago adds 48 cents on top of that.
Truck drivers, salesmen “anybody that lives up there and has a reason to come down here” buys his cigarettes to take advantage of the lower price, he said.
A pack of Marlboro’s at Butts goes for $3.39. That same pack can cost $6 in Chicago and $3.05 across the state line in Saint John, Ind.
Craig Fishel, a spokesman for RJ Reynolds Tobacco, said there is proof that Illinois lost out after the state’s 2002 tax increase. RJ Reynolds makes Camel, Winston, Salem and Doral.
In Fiscal Year 2002, before the last tax increase went into effect, RJ Reynolds sold 885 million packs in Illinois, he said.
Based on sales from the first half of this fiscal year, which ends June 30, the company expects to sell 665 million packs.
That, Fishel said, constitutes a 21 percent drop in the last three years.
In the same time frame, Wisconsin’s volume increased by 2 to 3 percent, Missouri’s sales are up 7 to 8 percent and Kentucky’s volume is up 28 percent, he said.
“We can say with reasonable certainty that there has been (sales) increases along the borders,” he said.
Abdallah Kattoum, for one, is nervous.
Kattoum manages Express Lane Gas & Food Mart in Rock Island and said he already loses business to the Iowa side of the Quad Cities.
“There’s a lot of people over here saying about Iowa prices, saying it’s too much difference,” he said.
Kattoum did not know that the governor is considering another tax increase.
Asked how another hike would affect his business, Kattoum just sighed, “I don’t know now.”
His worry, however, may be for nothing.
For one thing, most of Illinois’ neighbors are considering new cigarette taxes of their own, which could at least close the gap between Illinois’ prices and those of Iowa, Wisconsin, Indiana and Kentucky.
That includes a proposal in Iowa to raise the state’s cigarette tax 80 cents, a plan backed by Democrat Gov. Tom Vilsack. Iowa’s House Republicans, however, said Friday they reject the proposal.
In Illinois, the possibility of a cigarette tax hike also looks iffy.
Senate President Emil Jones opposes the plan, favoring instead a riverboat casino in Chicago and a reworking of the sales tax.
House Speaker Michael Madigan supports the 75-cent increase.
“He think it’s the appropriate thing to do,” Madigan spokesman Steve Brown said.
The cigarette tax is one of several controversial pieces of the proposed budget Blagojevich announced Feb. 16. The governor also proposes an overhaul of the state pension system and plans to take money from other funds to pay for education.
Kirsten Singleton can be reached at 544-2819 or kirsten.singleton@sj-r.com.
http://www.sj-r.com/sections/news/stories/48999.asp
Gov plans big boost in cigarette tax
DAVE MCKINNEY
02/16/2005
SPRINGFIELD — Gov. Blagojevich wants smokers to cough up 75 cents more per pack to help build more Illinois schools and pave roads — a move that would give the state one of the highest cigarette taxes in the country.
The governor will outline the proposal today when he lays out his 2006 spending plan before a joint session of the General Assembly.
Blagojevich also is expected to propose a bailout of the Chicago Transit Authority and roughly $800 million in state pension cutbacks that already are drawing fierce resistance from public employee unions, according to legislative sources briefed on his plan Tuesday.
TAXES ON A PACK OF CIGARETTES IN CHICAGO
Federal: 39 cents Cook County: $1 Chicago: 48 cents State: 98 cents (would jump to $1.73 under Gov. Blagojevich’s proposal)
The second cigarette tax increase Springfield has thrust upon smokers in three years would raise the state’s take on cigarette packs from 98 cents to $1.73, a jump of 76 percent. The increase, hailed by anti-tobacco groups, would give Illinois the nation’s fourth highest tax on cigarettes and the highest among its neighbors, according to a November survey by the National Center for Tobacco-Free Kids. Rhode Island charged the most per pack, $2.46.
Under the administration’s plan, upon which Blagojevich aides declined comment, the new money raised from cigarettes would help support a $1.5 billion borrowing program to build roads and schools.
‘I think we should do a casino’
The tax increase is sure to draw opposition from lawmakers who represent areas bordering states that already siphon off hordes of Illinois smokers seeking to buy less-taxed tobacco products.
Senate President Emil Jones (D-Chicago) said a cigarette tax increase would hurt retailers in his South Side district and Downstate that compete with cigarette outlets in Indiana and other neighboring states.
“It’s going to be regressive in nature, so I think we should do a casino,” Jones said, alluding to gambling expansion, which is not expected to be part of the governor’s budget address.
Others questioned the wisdom of supporting long-term borrowing on a cigarette tax increase when tobacco tax revenues are built upon stagnant consumption levels.
“It’s precarious to do a 25- or 30-year bond program on a revenue source that has got a declining base,” said Sen. Steve Rauschenberger (R-Elgin).
The biggest money generator Blagojevich is expected to embrace is more of an accounting maneuver that will involve a mix of pension cuts he will seek from the General Assembly to ease a $2.6 billion pension payment state government must make after July.
The governor is expected to express support for cutting back benefits for newly hired state workers and reeling in pension-enhancing pay increases some career educators take before retiring.
Cap on pension benefit hikes
Blagojevich also would limit yearly increases in pension benefits for new hires to no more than 2 percent; current retirees get 3 percent. He also is expected to back restrictions that would impose a moratorium on any future pension sweeteners unless there is a clear-cut funding source identified.
If all of the pension changes are enacted this spring, the administration estimates they would save the state approximately $800 million over the next several decades — money Blagojevich wants to use up front to reduce the $2.6 billion pension commitment required of the state by mid-summer.
But major employee unions like AFSCME and the Illinois Education Association, which backed Blagojevich for governor, are lining up against the proposals.
In addition, Blagojevich is expected to revive his bid to impose the state’s 6.25 percent sales tax on businesses that buy computer software in bulk but don’t currently pay sales taxes. Opposed by business groups, that idea was rejected by lawmakers in November, but the governor wants another try in hopes of raising $65 million for transit operations.
Money for CTA?
In briefings to lawmakers, the administration indicated money would be parceled out to the CTA and other transit agencies statewide, but did not specify how much the CTA would get. The agency has projected a deficit that could reach $95 million by July, if looming service cuts are postponed that long.
Late Tuesday, a CTA spokeswoman declined comment on the proposal or whether it would meet the agency’s funding needs.
Finally, Blagojevich will announce plans to divert $140 million in new tax revenues to schools. Another $420 million would come from specific funds throughout state government, though the administration did not offer details on that proposal during briefings with the Legislature.
http://www.freerepublic.com/focus/news/1344423/posts?page=4
