Study: tobacco smuggling now a way of life in high tax states

The Mackinac Center for Public Policy just released its 2013 estimates for cigarette smuggling rates in 47 US states and the results may surprise even the most jaded among you. The study shows the rates of tobacco piracy across the nation as rated against the sin tax rates in each state. The tops spots won’t come as too much of a shock to those who have been following our coverage of this issue, but there are others moving up fast on the list.

In the newest iteration of our annual cigarette smuggling study, we find that New York remains America’s number one smuggling state for inbound, illegal traffic at 58.0 percent of the total market. That is, of all the cigarettes consumed in the Empire State in 2013 — legal and illegal —58 percent were smuggled in. We also estimate that nearly 25 percent of the Michigan cigarette market is comprised of contraband smokes.

Barely trailing New York are Arizona (49.3 percent), Washington (46.4 percent), New Mexico (46.1 percent) and Rhode Island (32 percent). In the latest period of study, Illinois moved up 16 places in the rankings to 14th, following large tax increases in Cook County (Chicago).

That New York leads the pack is no surprise, given that tax rates in the Big Apple have driven the cost of a pack of Marlboros up to fifteen dollars. It should be noted that the Mackinac figures include what they refer to as “casual smuggling” in addition to large, commercial level illegal shipping. The casual smuggler is generally someone who drives over the border to buy their smokes and brings them home for personal consumption. (This is either legal within purchasing limits or at least tolerated to a certain extent in most states.) But even if you subtract out for the casual smugglers, that’s still a lot of large scale crime. And more to the point, the entire 58 percent represents packs of cigarettes on which the state collected zero tax.

So what’s to be done?

Rampant smuggling — and its related ugliness — can be thwarted to a degree by cutting taxes, improving law enforcement operations, or both. We strongly suggest the former route. Higher excise taxes are the root of the problem so lower ones should be at the forefront of a solution.

Enough data has been collected by this point that we can construct a sort of Laffer Curve for the willingness of people to break the law and purchase black market cigarettes based on the tax rate. At a very low tax rate (close to other similarly base priced products) virtually no one is going to risk an encounter with the law to save a few cents and smuggling is not profitable. (And therefore doesn’t happen in measurable amounts.) And, of course, the revenue the state takes in is lower. But you can only increase the tax rate a certain amount before an increasing number of people are willing to take the risk and buy off the black market. By the time you jack up the taxes as high as New York has gone, more than half the cigarettes consumed are black market, you’re on the far side of the bell curve and the state is actually making less money than they would at a lower rate.

Meanwhile, more and more law enforcement resources have to be deployed to fight this “crime wave” rather than dealing with more serious social ills. This is self destructive behavior on the part of these tax happy states and it needs to be curbed.

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