Cigarette Taxes Lead to Black Markets

December 10, 2013

Anti-smoking activists in California are pushing for a tax hike on cigarettes, but the measure could backfire, says Steven Greenhut, the California columnist for U-T San Diego.

Anti-smoking advocates contend that increasing the price of cigarettes is the single best way to reduce smoking. But economists will say that tax hikes have diminishing benefits. Eventually, a really high tax will lead to black markets, as shoppers find ways to acquire highly-taxed products tax-free.

  • To illustrate this phenomenon, Greenhut uses the example of a government imposing a $1 million tax on the sale of poodles. Poodle sales would continue, but government revenue from the tax would drop to zero. "We'd see an underground economy emerge. Some people would shift their affection to Labrador Retrievers, but many others would get a Poodle smuggled from Mexico or elsewhere," says Greenhut.
  • Consumers pay $6.86 in state, federal and city taxes for every pack of cigarettes sold in New York City. But evidence now suggests that the tax hike has led to a black market, with 60 percent of the cigarettes sold in the city being brought in from other states where they are not subject to the tax.
  • In California, the average pack of cigarettes costs $5.44, $2.27 of which goes to taxes. Currently, 20 percent of all cigarettes sold in California are smuggled in from other states. If California's proposal to increase the cigarette tax by $2.00 is passed, it is estimated that the smuggling rate will rise to 39 percent.

While the rate of smoking has fallen, it is hard to definitively attribute that to tax measures. Because smoking rates have been falling for the last 50 years, it is not clear whether the drop is due to tax hikes or to other cultural factors that have reduced the number of smokers.

Source: Steven Greenhut, "Cigarette Sin-Tax Hike Could Boost Black Markets," Reason Magazine, November 22, 2013.

 

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