The lost potential revenue totals about $10 million per month, said David Merriman, professor of public administration and head of UIC’s economics department. He has studied cigarette tax avoidance worldwide for 15 years.
Merriman organized teams of researchers to collect littered cigarette packs in 100 Chicago neighborhoods and nearby jurisdictions to examine their tax stamps. He reported on the study in the May issue of the American Economic Journal: Economic Policy.
Chicago’s state and local taxes totaled $4.05 per pack, compared to $1.37 outside Cook County, in July 2007, when the researchers collected the packs. The $2.68 difference reduced the likelihood that a pack was taxed in Chicago by almost 60 percent.
By comparison, New York City loses only about half its potential cigarette tax revenue to tax avoidance, even though its taxes are higher than Chicago’s.
Distance reduces tax avoidance, Merriman said. Every mile between Chicago and the lower-tax source increased the likelihood of a Chicago stamp by about one percent.
“This research suggests that an increase of $1 per pack in Illinois, as recently proposed, would drive more Chicago residents to buy their cigarettes in Indiana, but would be likely to have a relatively small effect in the rest of the state,” Merriman said.
“Cigarettes are a useful laboratory for the study of tax avoidance, given their cost, the easy access to low- or no-tax cigarette sources like Native American reservations or the Internet, and a relative lack of enforcement,” he said.
Merriman said that many states increase cigarette taxes to discourage smoking and raise revenue, but higher taxes might lead smokers to use lower-priced, hand-rolled or smuggled cigarettes, or to smoke fewer cigarettes more intensively.
A separate survey of appropriately disposed cigarette packs indicated that the sample of 1,000 littered packs was representative of all packs. Despite the evidence, Merriman acknowledged that the use of littered packs as concrete, empirical evidence might allow some bias.
“Litterers may be disproportionately scofflaws,” he said. “People who smoke only in their homes and don’t litter may be disproportionately inclined to comply with taxes.”
The study was conducted with UIC’s Institute of Government and Public Affairs. It was funded by the Robert Wood Johnson Substance Abuse Policy Research Program.
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Anne Brooks Ranallo, 312-355-2523, [email protected]