NCPA - National Center for Policy Analysis


January 15, 2010

The state of Washington is considering an increase in its cigarette taxes by $1 per pack.  As shown in a 2008 Mackinac Center study on cigarette taxes, these tax hikes carry a large degree of unintended consequences.  Increasing cigarette taxes is expected to ensure that half of all cigarettes smoked in Washington are smuggled in from other states, says Michael D. LaFaive, director of the Mackinac Center's Morey Fiscal Policy Initiative.

In "Cigarette Taxes and Smuggling: A Statistical Analysis and Historical Review," the Mackinac Center reviewed the efforts of states trying to fight the growth of smuggling, documented the history of cigarette taxes in Michigan, New Jersey and California, and modeled the level of illicit tobacco use in states due to cigarette tax rates.  Mackinac recently updated the model to include changes to the Federal Excise Tax, as well:

  • The 2008 study already found that Washington has the fourth highest smuggling rate.
  • In applying the model to the proposed tax increases, Mackinac found that a $1.00 per pack increase in taxes would jump the state's smuggling rates from 39.3 percent to 51.5 percent.
  • Legal sales would decrease by at least 20 percent over 12 months.

This is evidence not of people quitting smoking due to higher taxes, but of individuals and businesses finding ways to evade cigarette taxes, says LaFaive.  A 2004 study helps confirm this by finding that up to 85 percent of the sales tax decrease comes from tax avoidance rather than actual declines in smoking.

The bulk of the cigarette smuggling increase comes from commercial smuggling -- of organizations that import cigarettes from lower tax areas or through counterfeiting with distribution systems in state.  If the tax hike passes, it's expected that 3 out of 10 cigarettes in Washington will be through these means, says LaFaive.

A greater amount of smuggling also means more of the activities that go along with it: violence, counterfeiting, hi-jacking and theft, says LaFaive. 

Source: Michael D. LaFaive, "Half of Washington Smokes Expected to Be Illegal With Proposed Tax Hike," Mackinac Center, January 13, 2010; and Michael D. LaFaive, Patrick Fleenor and Todd Nesbit, "Cigarette Taxes and Smuggling: A Statistical Analysis and Historical Review," Mackinac Center, December 2, 2008.

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