Excise taxes have failed to rehabilitate Illinois’ failing fiscal health. But lawmakers have yet to kick the habit.
Bad habits are hard to break, even when government tries to curb our smoking, drinking and calorie intake by imposing one of the heaviest tax burdens in the nation.
But if Illinoisans’ holiday excess is to be followed by resolutions to be better next year, maybe politicians, too, need to end the bender and use excise taxes in moderation.
A June study from the nonpartisan Tax Foundation found that Illinois in fiscal year 2015 captured the seventh-highest amount per capita in excise taxes, which the study defines as “a tax on a specific good or activity.”
Illinois’ variety of excise taxes are compounded by those imposed at the local level. Chicago, for example, levies a 9 percent “amusement tax” on concerts and sporting events. In 2015, the city expanded the tax to include streaming services, such as Netflix and Hulu. The Liberty Justice Center is suing the city on behalf of online streaming service customers, arguing that the tax is unconstitutional.
Politicians use sin taxes to achieve two goals: curb behavior advocates deem undesirable, and generate quick tax revenue. But those objectives are simply at odds with each other: If a sin tax applied to certain products and services successfully discourages residents from purchasing them, tax revenues tied to use of those products and services will naturally decline.
Sin taxes on cigarettes are among the least reliable. Tax Foundation research from 2017 shows that inflation-adjusted net collections from cigarette taxes demonstrate a pattern of brief revenue spikes immediately after the increases, followed by significant long-term dips. As tobacco use has been in decline since the 1960s, cigarette sin taxes are extremely unreliable as a revenue source.
Data from the Illinois Department of Revenue show the Prairie State’s 2012 cigarette tax hike fell more than $120 million short of projections.
Alcohol is another product often singled out for higher taxation. The destructive consequences of alcoholism and the dangers of driving under the influence are widely recognized, and policymakers have justified alcohol sin taxes, in part, as a way to discourage overindulgence. But researchers at the Urban Institute and Brookings Institution’s Tax Policy Center found that, despite Illinois’ statewide alcohol tax hikes in 1999 and 2009, the levy had no significant impact on drunk driving fatalities.
Excise taxes are also largely regressive. While affluent residents may not tighten their belts around high excise taxes, low-income consumers suffer higher costs. Combined federal, state and local excise and sales taxes in the city of Chicago can amount to 28 percent of the cost of liquor.
Exorbitant alcohol and cigarette tax hikes can provoke border-town residents to find friendlier prices in neighboring states. Black markets for overtaxed goods can diminish state revenues, as “smugglers are inclined to buy cigarettes in low-tax jurisdictions to resell them in high-tax jurisdictions for profit,” Tax Foundation research found. And according to at least one estimate, Illinois loses up to $30 million annually to cross-border alcohol sales.
Soda taxes proved the regressive nature of “sin taxes,” according to the Tax Foundation. But that didn’t stop Illinois’ most populous county from imposing an unpopular soda tax, while exaggerating its potential public health benefits. That tax was repealed following a taxpayer backlash.
Taxing Illinois’ appetites has failed to help rescue the state from its fiscal crises. Rather than confronting the sources of the state’s mounting debts, Springfield repeatedly opts for costly borrowing and fruitless tax hikes to score a temporary fix. Lawmakers should follow this sage advice: The first step to overcoming an addiction is admitting you have a problem.