In his recent speech calling for legislation to stop corporate inversions, President Obama added fuel to the misperception that when a company moves its headquarters to another country it avoids paying U.S. taxes. He...
- The Tax Policy Blog
- Holy Smokes! Washington Loses $376 Million to Cigarette T...
Holy Smokes! Washington Loses $376 Million to Cigarette Tax Evasion in 2012
The Washington Department of Revenue released a report last month estimating that over 35 percent of total state cigarette sales illegally evaded cigarette taxes. That amounts to $376.4 million in lost revenue. To put that in perspective, that’s enough to buy nearly 42 million packs of cigarettes in Washington State.
By comparing in-state per capita cigarette sales with per capita consumption, the Department concluded that there were 147.9 million packs of untaxed cigarettes consumed during the 2012 fiscal year. Just over 46 million of those packs were legally exempted from taxation, leaving 101.4 million illegally untaxed packs sold in 2012.
Washington taxes cigarettes at $3.025 per pack—that was fifth highest in the nation in 2012. The rate exceeds all surrounding states (Oregon only taxes at $1.18 per pack and Idaho at $0.57 per pack). The average price of cigarettes in Oregon last year was only $5.74. In Idaho it was $5.11—almost half the price of the average selling price in Washington. That price difference creates an incentive for consumers to shop for cheaper cigarettes elsewhere, reducing the revenue collected by Washington.
Lost tax revenue isn’t the only problem—the price differential across state lines creates a lucrative business opportunity for cigarette smugglers. When high-tax states are neighbored by low-tax states, smugglers can move and sell cigarettes across borders for a handsome profit. Such activity has been linked to violence, theft, and government corruption. Some states (such as Maryland and Virginia) have turned to harsher penalties for those caught engaging in these criminal activities. Instead of seeking to regulate a side-effect of high taxes, lawmakers should instead address the source of the problem. Lowering cigarette taxes will decrease the incentive to smuggle across state lines, in addition to reducing the crime associated with it.
More on Washington here.
Follow Elizabeth on Twitter @elizabeth_malm.
Subscribe to the Tax Foundation Newsletter
Join the Tax Foundation's fight for sound tax policy Go
About the Tax Policy Blog
The Tax Policy Blog is the official weblog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.