Increasing the Cigarette Tax

This report estimates the revenue and distributional effects of increasing the state’s cigarette excise tax by $0.50 per pack from $1.98 to $2.48. After taking into account the behavioral responses of smokers, Reif estimates that the tax increase would raise up to $175 million per year and reduce Medicaid expenditures by almost $1 million per year. The amount of revenue generated depends on the extent to which a tax rate increase would boost tax avoidance in large border cities like Chicago.

Although cigarettes are predominantly consumed by the poor, many would significantly decrease their consumption in response to the tax, thereby mitigating some of their tax burden. Moreover, if smokers are not making rational, well-informed decisions, then economic theory predicts that an increase in the cigarette tax may benefit them by encouraging healthier behavior.