Study: High Cigarette Taxes Cause Widespread Smuggling

Published December 31, 2010

High tax rates on cigarettes are driving up the rates of illegal cigarette smuggling, according to a report by the Mackinac Center for Public Policy in Midland, Michigan.

The authors calculated that in 2009 more than half (51.8 percent) of the cigarettes consumed in Arizona had been smuggled into the state, making it the leader in cigarette trafficking. The authors believe Arizona’s position is a direct function of its 82 cents per pack cigarette tax hike in December 2006, a 2009 federal cigarette tax hike, and the state’s proximity to Mexico.

“In 2007, Arizona had already increased its state excise tax on cigarettes from 118 cents per pack to 200 cents, but in 2009, the U.S. government increased the federal cigarette excise tax from 39 cents per pack to 100.66 cents,” the report notes. “Together, these tax changes resulted in a full 143.66-cent-per-pack increase, raising the incentive to smuggle cigarettes from Mexico to Arizona.”

Rounding out the top five smuggling states are New York (47.5 percent), Rhode Island (40.5 percent), New Mexico (37.2 percent), and California (36.3 percent).

‘Not Sheep for Shearing’
“It should come as no surprise that states with increasing excise taxes also saw significant increases in total smuggling rates,” said study coauthor Todd Nesbit, a College of Charleston assistant professor of economics and Mackinac Center adjunct scholar. “Taxpayers are not sheep lining up for a shearing—if they have to cross a border to save money, they will.”

Between January 2007 and 2009, 21 of the 48 contiguous states—including tobacco state North Carolina—raised their cigarette taxes, producing a total of 27 tax hikes. In 2010, tobacco state South Carolina and five other states followed suit.

The authors examined both “commercial” and “casual” smuggling. Commercial smuggling involves large-scale and typically long-distance operations, while casual smuggling typically involves individual cross-border purchases for personal use.

In the latter category, Michigan finished 5th among the 47 states in the study at 11.6 percent of total state consumption, topped only by New York (19.9 percent), Rhode Island (18.2 percent), Washington (14.5 percent), and Montana (13.2 percent).

Associated with Crimes
Commercial smuggling also plays a significant and often dominant role in smuggling. The top five states for commercial, in-bound traffic are New Jersey (29.1 percent), New York (28.5 percent), Vermont (24.2 percent), Massachusetts (23.3 percent), and Connecticut (20.9 percent).

“Few people realize the vast array of unintended consequences, such as theft and violence, inflicted on job providers, consumers, police, and other innocent victims,” said Michael D. LaFaive, Mackinac Center director of fiscal policy and the study’s coauthor.
Michigan’s commercial smuggling rate is 16.6 percent. The new study details how just one recent commercial smuggling case in Michigan allegedly involved the illicit purchase of more than 40 million cigarettes between October 2008 and July 2009.

Theft, Hijacking, Violence
These illicit transactions represent lost revenue to the state Treasury and can produce a raft of unintended consequences including theft, hijacking, violence against residents, and distribution of dangerous, often adulterated counterfeit cigarettes, the report observes.

The authors also attempted to forecast the impact of proposed cigarette tax hikes in Ohio, Illinois, California, and Michigan. They found a $1.25 per-pack tax increase in Ohio would increase the state smuggling rate to 23.3 percent from 9.2 percent of in-state cigarette consumption. In Illinois, a $1 tax increase would cause cigarette smuggling to go from 5.9 percent to 26.3 percent. California would see its smuggling rate increase from 36.3 percent to 51.9 percent with the adoption of an additional $1 per pack tax hike.

Five smuggling destination states moved up by double digits between 2006 and 2009 in the report’s state rankings of net smuggling rates: Texas, from 16th to 6th; Mississippi, from 37th to 22nd; South Dakota, from 28th to 12th; Maryland, from 24th to 9th; and Iowa, from 33rd to 15th.

The report’s authors believe these large smuggling rate increases relative to those of other states can likely be attributed to the five states’ substantial state excise tax increases over the past three years. Texas increased its per-pack cigarette tax from 41 cents to $1.41 in 2007; Mississippi, from 18 cents to 68 cents in 2009; South Dakota, from 53 cents to $1.53 in 2007; Maryland, from $1 to $2 in 2008; and Iowa, from 36 cents to $1.36 in 2007.

Stable Taxes, Less Smuggling
Similarly, four states declined by double digits in state rankings of net smuggling rates: Illinois, from 17th to 30th; Pennsylvania, from 21st to 31st; Massachusetts, from 13th to 32nd; and Nevada, from 29th to 41st. While many other states approved increases in their cigarette excise taxes since 2006, none of these four states had changed their cigarette tax rate by the close of fiscal 2009.

The report is an update of the Mackinac Center’s 2008 cigarette tax and smuggling study, which provided estimated smuggling rates for 47 of the 48 contiguous states.

Michael D. Jahr ([email protected]) is senior director of communications for the Mackinac Center for Public Policy in Midland, Michigan.

Internet Info

“Cigarette Taxes and Smuggling 2010,” the Mackinac Center for Public Policy: