SOURCE: http://news.medill.northwestern.edu/chicago/news.aspx?id=209332 by Megan Hickey
Oct 23, 2012

Faced with a $298 million budget deficit, Mayor Rahm Emanuel has pledged not to raise taxes on homes, gasoline or retail purchases. However, he has not ruled out a cigarette tax hike for the city of Chicago.

Chicago already has the second highest cigarette taxes in the country, second only to New York City. As of June, the average total cost of a pack of cigarettes in Illinois was $10.25, cheaper than only New York’s $12.50 per pack.

Cook County Board President Toni Preckwinkle proposed a plan Tuesday to raise the Cook County tax on smokes to $3 from $2. Faced with a large budget shortfall, Emanuel has not ruled out a similar increase for Chicago’s tax.

“If we do consider the cigarette tax, it has to invest in children’s health,” Emanuel said in a recent press conference about the proposed 2013 budget.

But a tax hike won’t necessarily mean more money for the city because many smokers have the option of driving across state lines to buy cheaper cigarettes. A pack in Wisconsin is about $7.98, which ranks it 11th in the nation. Indiana is 39th on the list at $5.56 a pack.

The Cook County Board acknowledges Chicago’s smokers may take their business elsewhere if the tax hike is passed. “As taxes go up, consumption goes down, especially for cigarettes,” said Cook County spokesman Owen Kilmer. “So we are actually expecting a revenue loss.”

In Chicago, the combined tax on a pack is currently $5.67, which comprises four different taxes. The federal tax is $1.01; Illinois tax is $1.98; Cook County collects $2; and the city of Chicago collects 68 cents.

Any increase would come at a time when cigarette sales are already down although tobacco companies are still managing to profit through other products. Reynolds American Inc. posted a nearly 7 percent profit increase in the third quarter Tuesday. The tobacco giant can thank e-cigarettes and smokeless tobacco products. The company performed slightly under analyst’s expectations and its stock price fell 58 cents to close at $41.94.

Reynolds American is the second largest tobacco company in the U.S. The maker of brands such as Camel, Pall Mall, and Winston posted $420 million in net income, or 74 cents per diluted share, a 6.6 percent increase from $394 million, or 67 cents per share, in the same period a year ago.

Total sales fell 3.7 percent, coming in at $2.1 billion from $2.2 billion in 2011. Sales of the company’s tobacco products, in particular, fell 6.1 percent from $1.89 billion to $1.77 billion. In the company’s conference call with analysts, Reynolds American CEO Daniel M. Delen blamed an “intensely competitive promotional environment.”

Bonnie Herzog, analyst at Wells Fargo Securities, estimated that underlying tobacco consumption during the quarter was down 3.5 percent. If Chicago taxes are hiked further, Kilmer expects cigarette sales here to decline even further.

But this does not mean that tobacco companies such as Reynolds American are in danger. Herzog cited the company for its innovation in smokeless tobacco and e-cigarette brands. “RAI has transformed itself into a comprehensive ‘total tobacco’ company, with leading brands and a solid strategy for long-term growth.”

However, the overall decline in cigarette consumption is not a short-term trend. Net sales for the last nine months decreased 3.6 percent from the same period a year ago, to $6.2 billion from $6.5 billion. Reynolds American posted $1.13 billion in net income for the last nine months, or 1.98 cents per diluted share, a 2.8 percent increase from the same period a year ago, which saw a net income of $1.1 billion and 1.88 cents per diluted share.

Tax hikes would only further this trend and result in lost revenue. But the health benefits exceed the costs, according to Kilmer, who cites a projected 7.2 percent decrease in youth smoking and the prevention of 18,400 children from becoming addicted to tobacco. In the long term, health-care costs savings could also reach $640.6 million.

As for the effects on Chicago’s consumers, Kilmer explained that a sales tax cut on Dec. 31 would save Cook County taxpayers $86 million in 2013. “It will be cheaper to buy groceries and baby formula,” Kilmer said. “Just not cigarettes.”