NCPA - National Center for Policy Analysis

Taxing Tobacco

July 22, 2002

A new report from the Federation of Tax Administrators shows that 17 states have raised their cigarette taxes this year. Bruce Bartlett reports that this will likely increase illegal interstate smuggling without yielding much new revenue.

Cigarette taxes have increased immensely this year and differ greatly by state:

  • On January 1 of this year, the median state cigarette tax rate was 34 cents per pack and the average was 45 cents.
  • In just 6 months, the median has risen to 41 cents and the average to 54 cents.
  • The highest state tax rate is now $1.50 per pack in New York and New Jersey, with New York City having a combined tax of $3.00 per pack.
  • In contrast, the lowest taxing state is Virginia at just 2.5 cents.

According to Barlett, this huge divergence in cigarette taxes leads to interstate smuggling. Smuggling cigarettes to New York City from Virginia can yield an easy profit of almost $30 a carton.

Police have warned that organized crime was moving into the cigarette smuggling business. Their experience with other forms of trafficking has tended to increase the quantity of smuggled cigarettes. For example, they are able to counterfeit tax stamps. Additionally, terrorists can profit from cigarette smuggling as well. Recently, Hezbollah was convicted of running a multimillion-dollar trafficking operation out of North Carolina.

Bartlett also argues that these new taxes will not yield much new revenue. Between 1992 and 2000 the average state cigarette tax rate increased by 64 percent. [SEE FIGURE]. However, gross state tobacco tax revenues only rose by 35 percent. Moreover, these new taxes disproportionately burden the poor. Finally, increased interstate smuggling will erode controls on minors purchasing cigarettes.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 22, 2002.

For FTA Excise Tax data

http://www.taxadmin.org/fta/rate/tax_stru.html#Excise

 

Browse more articles on Tax and Spending Issues