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Emanuel Proposes Making Chicago Most Costly for U.S. Smokers

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Oct. 23 (Bloomberg) -- Chicago Mayor Rahm Emanuel proposed making the nation’s third-most-populous U.S. city the priciest in which to light up, boosting the cigarette tax by 75 cents a pack in hopes of narrowing a $339 million budget gap.

Emanuel, 53, offered the increase today as part of his $8.7 billion budget for 2014, a plan that leans on higher fines and fees instead of raising property and income levies.

The mayor said the city’s ability to avoid dramatic increases in real estate taxes hinges on state lawmakers approving legislation to reduce Chicago’s unfunded pension liability.

“Should Springfield fail to pass pension reform for Chicago, we will be right back here in Council early next year to start work on the city’s 2015 budget -- a budget that will either double city property taxes or eliminate the vital services that people rely on,” Emanuel said in his budget speech.

The 50 percent increase on cigarette taxes, to $7.42 per pack, would move Chicago ahead of New York as the nation’s most heavily taxed smoking venue. A pack of Marlboro at a south Loop convenience store costs $11.95, including taxes. If Emanuel’s proposal is approved, the price would jump to $12.70.

“The cigarette tax has the benefit of leading to a healthier Chicago,” Alderman Joe Moore said in an interview. “A jurisdiction that increases taxes on cigarettes results in a healthier populace -- less people smoking, less people who need health care, so it’s a win-win for everybody.”

Financial Ruin

The new revenue also could save Chicago from financial ruin. While U.S. cities are showing strengthened finances and are projecting their first collective revenue increase since 2006, according to the Washington-based National League of Cities, Chicago is threatened with pension deficits.

Tax increases of more than $500 million could come in 2015 unless the Illinois General Assembly approves changes in city’s underfunded pension systems. State lawmakers are in session this week in Springfield, the capital.

Chicago and surrounding Cook County have the largest pension burdens among the 50 most indebted U.S. local governments, according to Moody’s Investors Service. Pension liabilities represent 678 percent of Chicago’s revenue, according to a Moody’s study released Sept. 26.

Rating Cut

Moody’s cut Chicago’s bond rating three levels to A3, seventh-highest, in July and dropped Cook County a step to A1, fifth-best, in August, citing pension liabilities in both cases. The findings mirror those in the New York-based company’s June study of state pensions. That report showed that Illinois, its lowest-rated U.S. state, with an A3 grade, had the highest ratio of retiree obligations to revenue, at 241 percent.

“I don’t know of a state that has ever put a city at risk like it is now with pensions,” said Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago. Emanuel is confined by circumstances, he said.

“I think he’s in a box and the box is only made worse by what he inherited,” Pagano said.

To contact the reporter on this story: Tim Jones in Chicago at tjones58@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net