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Increase in Tobacco Tax Leads to Decrease in Tax Revenues From Cigarette Sales in Chicago

James Gibson recently asked a man for a cigarette, to which the man replied that he “just bought this one for 50 cents.”

Gibson, 33, said he asked a number of “passers and mouth flappers” for a cigarette as he waited for a bus in front of a gas station on the corner of 35th Street and Dr. Martin Luther King Jr. Drive.

After negotiating with a fellow smoker, Gibson finished a “bummed” Newport cigarette before he boarded the bus.

“If I ask enough people, it will help me avoid paying for cigarettes at the gas station and on the streets,” said Gibson.

Scenes like this are becoming increasingly common as high taxes on cigarettes are changing buying habits in Chicago.

A pack of cigarettes is worth 98 cents per pack to the state of Illinois and $1.01 per pack to the U.S. federal government. After state, local and federal taxes — the city of Chicago adds 68 cents while Cook County adds $2 in taxes —  a pack of cigarettes in Chicago is one of the most expensive in the Midwest, according to a yet to be published report by David Merriman, a professor at the University of Illinois-Chicago.

While neighboring states have increasingly higher tobacco taxes in Iowa–$1.36, Minnesota–$1.50 and Wisconsin–$2.52, Illinois’ residents in Chicago may be decreasing the city’s tobacco tax revenue by buying elsewhere, according to data received from Chicago’s Department of Revenue.

Buying habits have changed. Instead of buying cigarettes in Chicago, now consumers buy cigarettes outside the city, or even outside the state to avoid paying taxes, according to an emailed statement from Ed Walsh, spokesman for Chicago Department of Revenue.

Sales tax revenue on cigarettes in Chicago has decreased 67.78 percent since 2001, Walsh said.

On the South Side of Chicago, neighbors have witnessed last spring’s federal tax increase lead the distribution of cigarettes from stores to street corners where they are cheaper.

One local resident said he sees cigarettes sold on the corner of 47th Street and Cottage Grove Avenue when he heads to work at 6 a.m. and when he returns home at 7 p.m.

“From the moment I go to work until the moment I get off of work, I see them guys out there selling cigarettes,” said Tony, 52, who asked that his last name not be disclosed. He also said people can usually buy a single cigarette or a pack of cigarettes from men on the street because they are “cheaper.”

Experts believe that the increase in taxes could decrease Illinois’ tobacco tax revenue and increase illegal sales. Peddlers on the street are making a $2 to $3 profit on each pack sold.

“The proximity of Chicago to other cities could lead to an increase in smuggling in Chicago if taxes are raised,” said Michael LaFaive, executive director of the Mackinac Center for Public Policy.

Professor Merriman’s report says a ratio of 3 out of 4 packs of cigarettes smoked in Chicago are purchased in neighboring states to avoid Illinois’ tobacco tax laws.

Since the tobacco tax increase in 2006, 289 businesses were cited for violating the tobacco tax law, according to Efrat Stein, spokeswoman for Chicago’s Department of Business Affairs and Consumer Protection.

And in 2008, 473 businesses in Chicago were cited for violating tobacco tax laws, Stein said. In the last two years, the city produced $600,000 in revenue from fines, she added.

The department has over 65 business inspectors, and 26 of them covertly and overtly enforce and investigate the sales of cigarettes at over 70,000 businesses in Chicago, Stein said.

Stein could not give numbers on the fines given to street peddlers, but said the department does investigate and fine them, too.

“We have a responsibility to even investigate and fine street peddlers that sell cigarettes without a license, not just businesses,” said Stein.

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