States’ Cigarette Sin Taxes Drive Booming Underground Markets

Published January 23, 2015

States’ excise taxes on tobacco, intended to curb tobacco use, are instead causing unintended consequences such as black-market sales and other extralegal economic activity, according to a new study of consumer behavior. 

The report by the Mackinac Center for Public Policy in collaboration with the Tax Foundation measured state cigarette smuggling as a percentage of total state cigarette consumption, both legal and illegal, in 2013.

In 2013, nearly 58 percent of all cigarettes consumed in New York were extralegal in nature. In Arizona, the second-most popular state for cigarettes purchased elsewhere, contraband cigarettes made up about 49 percent of the overall market.

In New York and other states, high excise taxes are not reducing tobacco use as intended. Instead, higher taxes drive consumers to buy cigarettes in other states or purchase from vendors transporting products from states with lower taxes.

Just Want to Save a Buck

In New York, “the state excise tax is the highest in the nation, and its state-local burden is the second-highest,” said Michael LaFaive, director of the Morey Fiscal Policy Initiative for the Mackinac Center. “I have no doubt that New York City’s local excise tax contributed to the overall smuggling rate, but we did not measure the city’s specific contribution.”

LaFaive said the Mackinac Study’s findings are not unique but add more data to the literature on excise taxes and consumer behavior.

“Ours is not the only study that identifies New York state has having a smuggling rate that touches 50 percent. There are also highly localized ‘discarded pack’ studies that zero in on New York neighborhoods, and they too measure high rates of smuggling,” he said. 

The study distinguishes between casual smugglers—individuals who may drive to or order cigarettes from a neighboring state to save money—and commercial smugglers who operate for profit. 

“A casual smuggler—who crosses some legal jurisdiction to acquire smokes for less money and for personal use—just wants to save a buck. Politicians don’t realize people are not sheep lining up to be sheared,” he said. “Theory and anecdotal and empirical evidence tell us individuals are willing to cross a border to save a buck. A commercial smuggler does so as well, but is essentially operating an organized criminal operation.”

Government Money-Raiser

Regardless of motivation, though, LaFaive said higher taxes are not the answer.

“Higher taxes are effective, if your only goal is to raise money for the government and persuade a small segment of the population to quit. Higher cigarette excise taxes almost always raise more money. They also persuade some people to quit,” he said.

“The question is, at what cost to people and society are we raising these revenues? There are countless unintended consequences that do not end up in the accounting matrix.” 

Addicted to Taxes

In addition to spending more money and time cracking down on excise tax evasion, states can help keep excise tax revenues at home by reducing those taxes on legal behavior, LaFaive said. 

“Tax increases are the primary reason for the smuggling in the first place, so tax cuts should be the first policy solution. It is much more efficient than imposing more strictures on selling a legal product,” he said. “The problem, of course, is that the political class is as addicted to the tobacco tax revenue as people are to nicotine. Their solution is often more law enforcement and higher penalties against smugglers.” 

Alexa Moutevelis Coombs ([email protected]) writes from Washington, DC.        

Internet Info:

“State Cigarette Smuggling as a Percentage of Total State Cigarette Consumption (Legal and Illegal), 2013,” Scott Drenkard, et. al., Mackinac Center for Public Policy,