Cigarette Taxes Lead to Smuggling

March 27, 2014

One of the unintended consequences of high cigarette tax rates is an increase in cigarette smuggling, say Joseph Henchman and Scott Drenkard of the Tax Foundation.

Thirty states and the District of Columbia increased their cigarette tax rates between 2006 and 2012. These tax differentials have created black market demand, and smugglers have begun procuring cigarettes from low-tax states to sell in high-tax areas. Data from the Mackinac Center for Public Policy demonstrate the rise and fall of smuggling rates as taxes change.

  • Smuggled cigarettes constitute a whopping 56.9 percent of the cigarette market in the state of New York. Not coincidentally, New York has the highest state cigarette tax (at $4.35 per pack; New York City charges an additional $1.50 per pack in local taxes).
  • As the cigarette tax rate in New York has risen 190 percent since 2006, the smuggling rate has increased 59 percent.
  • Behind New York, the states with the greatest cigarette smuggling activity were Arizona, New Mexico, Washington, Wisconsin, California, Rhode Island and Texas.
  • A study of five cities in the northeast found that 58.7 percent of cigarette packs being sold were not properly stamped, indicating that 30.5 percent to 42.1 percent of cigarette packs had been illegally smuggled.

Smuggling takes various forms, from counterfeit state tax stamps to counterfeit versions of legitimate brands to hijacked trucks. Sometimes, officials turn a blind eye to the illegality.

The high taxes amount to a "price prohibition" on cigarettes.

Source: Joseph Henchman and Scott Drenkard, "Cigarette Taxes and Cigarette Smuggling by State," Tax Foundation, March 19, 2014.

 

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