A Tax Hike Al Capone Could Have Loved

Published November 19, 2013

Councilmen in the City of Chicago recently passed a 50-cents-per-pack increase in the city’s cigarette tax, and with it a likely increase in smuggling and related crimes.

Chicago now charges a tax of $1.18 per pack. The overall tax on a pack of cigarettes in Chicago is now $7.17 when county, state and federal taxes are included. That’s 31 cents more tax than in New York City, which now has the second-highest total cigarette tax burden in the nation.

During Prohibition, the Windy City was beset by alcohol smuggling, government corruption and violence, among other problems. Al Capone and other gangsters profited from smuggling alcohol. Cigarettes are legal but high tobacco taxes have created an era of what we call “prohibition by price.”

Cigarette smuggling is already rampant in the United States. Our 2013 research on state excise taxes and smuggling indicates that as much as 60 percent of New York’s total cigarette consumption is smuggled into the state.

Possibly Number 1 . . . In Smuggling

Illinois could displace New York as America’s number one smuggling state. In our 2010 cigarette smuggling report (using 2009 data), we estimated Illinois’ smuggling rate was less than 6 percent of total consumption. But the state cigarette tax has increased $1 a pack since that report. We estimated that higher tax could cause smuggling to jump to more than 26 percent of the total market. And this was before Cook County’s $1-a-pack increase earlier this year.

Cigarette smuggling involves both commercial (such as large-scale criminal operations involving long-distance hauls) and casual forms (usually done by individuals making cross-border purchases for personal use).

Our statistical study is not city-specific, so while additional smuggling would be picked up, we could only pinpoint overall smuggling for all of Illinois, not that which is specific to the Chicago area. That type of work has been done though. A 2010 study (using 2007 data) by economist David Merriman of the University of Illinois-Urbana examined the tax stamps on discarded cigarette packs found in Chicago. The stamp is evidence taxes have been paid in a particular jurisdiction. Merriman found that 75 percent of the packages collected did not bear the city tax stamp and 29 percent originated in Indiana.

In 2012 a similar analysis was published regarding South Bronx, New York, an area described as “socioeconomically deprived.” The authors found that 76.2 percent of the packs collected did not bear the stamp showing state or city excise taxes had been paid.

Poorest Hit Hardest

This is of particular importance for two reasons. First, because Chicago has passed New York to top the high-tax list; and, second, because the regressive nature of high excise taxes hurts lower-income people more. A 2012 paper from Research Triangle Institute scholars shows that in 2010-2011, New York’s “lowest income group spent 23.6 percent of its annual household income on cigarettes,” which was up from 11.6 percent in 2003-2004.

But smuggling isn’t the only result of effectively banning a product. Essentially every misdeed associated with real Prohibition has been found lurking in its prohibition by price corollary. Consider some parallels:

Public corruption. Capone’s gang (and others) bribed key officials — including police officers — to overlook or participate in their illicit trade.

In 2012 undercover Federal Bureau of Investigation officers busted a Cook County revenue inspector for giving notice to retailers of future tobacco-related visits in exchange for money. Also last year a Maryland police officer in Prince George’s County was sentenced for his role in smuggling, which included the use of his patrol car and uniform.

Theft. Rumrunners were known for getting hijacked during deliveries. Cigarette truck hijackings occur in modern America, as legitimate tobacco wholesalers and retailers are also victimized by robberies.

One wholesaler in Michigan had to hire commando units to guide his cigarette shipments away from his warehouse after several hijackings. In 2010 in East Peoria, Ill., trucks stuffed with cigarettes were stolen from warehouses. Meanwhile, in November of 2012, Chicagoan Charles Watson was sentenced for his role in robbing a retail store of cigarettes while posing as a policeman.

Murder-for-hire. Prohibition had its share of murderers and some — like Vernon Miller — would do it on a contract basis for other bootleggers. (Miller, incidentally, had also worked as a bootlegger and as sheriff’s deputy).

Last October men associated with a cigarette smuggling case were charged in a plot to murder witnesses in a case against them, according to the New York Attorney General’s Office. This is not the only such case in recent years.

Big Costs, Little Gain

Cigarette taxes do lower smoking rates and usually raise government revenues, but typically not by as much as projected. Although proponents of higher taxes can point to decreased smoking rates and claim success, research shows the consumption rate largely shifts from legal smokes to illegal ones. Even then, these benefits are rarely weighed against the remarkable costs associated with high excise taxes.

Michael D. LaFaive ([email protected]) is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, a research and educational institute in Midland, Mich. Todd Nesbit ([email protected]) is a senior lecturer in economics at Ohio State University and an adjunct scholar with the Mackinac Center.