Unintended Consequences of Tobacco Taxes

July 30, 2014

The U.S. Senate held a hearing this week entitled, "Tobacco: Taxes Owed, Avoided, and Evaded." In testimony before the Senate Finance Committee, Scott Drenkard of the Tax Foundation described how tobacco taxes have led to smuggling.

A number of states have levied high taxes on cigarettes. Today, tobacco taxes are the highest that they have been in U.S. history. While the federal tax rate on cigarettes is $1.0066 per pack, state and local taxes can add several more dollars to the price, with taxes reaching $6.16 per pack in Chicago, Illinois.

The high tax burden has not been without consequences.

  • Cigarettes from low-tax states have been smuggled into high-tax states at such a rate that a majority (56.9 percent) of the cigarettes consumed in the state of New York are actually smuggled in from other jurisdictions.
  • New York imposes a cigarette tax of $4.35 per pack, and New York City adds an additional $1.50 in taxes per pack.
  • Since 2006, the tax rate in New York has risen 190 percent. At the same time, the smuggling rate has risen 59 percent.

Arizona, New Mexico, Washington and Wisconsin also have high rates of cigarette smuggling. The smuggling may consist of counterfeit versions of brand-name cigarettes, counterfeit tax stamps and even hijacked trucks. Many counterfeit cigarettes come from China, where counterfeiters produce an estimated 400 billion cigarettes annually.

Drenkard notes that the federal government has proposed to fund universal preschool by raising the cigarette tax to $1.95 per pack. Such a tax, he says, is not an appropriate way to fund that program. Not only is the tobacco tax a poor funding mechanism in the long-run, as tobacco use is declining, but broad-based taxes are the best way to fund a broad service like universal preschool.

Source: Scott Drenkard, "Tobacco Taxation and Unintended Consequences: U.S. Senate Hearing on Tobacco Taxes Owed, Avoided, and Evaded," Tax Foundation, July 29, 2014.

 

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