Dramatic Rise In Cigarette Smuggling

The growing disparity in state cigarette excise tax rates has led to a dramatic increase in casual cross-border sales and to large-scale interstate smuggling, concludes a report by the Tax Foundation.

State levies on cigarettes currently range from a low of 2.5-cents per pack in Virginia to a high of 82.5-cents per pack in Washington State. As a result of these disparities, cross-border shopping for cigarettes increased 395 percent and cigarette smuggling increased 253 percent between 1980 and 1994. (See figure.) http://www.taxfoundation.org/pressreleasechart1.html

This effect is evident in the change in adjoining states' cigarette sales after tax hikes.

• When Michigan raised its cigarette excise tax by 50-cents per pack in 1994, taxable sales plummeted by 21 percent; but neighboring low-tax states saw their taxable sales soar.

• Cigarette sales in Indiana, for example, rose by 8.5 percent in 1995, after having fallen for several years.

• In the northeast, New Hampshire, which has an excise tax of 25-cents a pack and no sales tax, sells more than twice the number of taxable cigarettes per capita than Massachusetts, where the excise tax alone is 76-cents per pack.

• Yet according to government data, the rate of cigarette smoking in the two states is nearly the same.

Similarly, tax-free Native American tribal reservations have become a favorite stop for consumers looking for inexpensive cigarettes. In Washington state, for example, sales on reservations comprise an estimated 14 percent of the market.

Source: Patrick Fleenor, "The Effect of Excise Tax Differentials on the Interstate Smuggling and Cross-Border Sales of Cigarettes in the United States," Background Paper #16, October 1996, 1250 H Street, NW, Suite 750, Washington, DC 20005, (202) 783-2760.