Inversions have been in the news consistently this summer as multiple companies have looked for legal paths away from the U.S. corporate tax system. Burger King became the latest corporation to add to the list after they...
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New Study: High Excise Taxes Drive Cigarette Smuggling in Boston, New York, Providence
A recent study suggests that high taxes on tobacco products drive black market cigarette sales, finding that some areas have black markets equal to nearly half of total sales. The study, which was based on an analysis of cigarette packs littered throughout major urban areas, found that nearly 40 percent of cigarettes in Boston are black market, as are 48 percent of cigarettes in New York City, 30 to 55 percent of cigarettes in Providence, Rhode Island, and 30 to 60 percent in Washington, D.C.
These findings are consistent with analysis by the Mackinac Center for Public Policy, which shows that smuggling accounted for about 61 percent of cigarettes consumed in New York state, 40 percent of those consumed in Rhode Island, 18 percent in Massachusetts, and 48 percent in Washington, D.C. Ultimately, this smuggling is driven by high excise taxes in some states, which create the profit motive for criminal activities.
The phrase “black market” cigarettes, however, can raise a ghoulish specter for readers when, in fact, it covers a wide range of activities. Some of these smuggled cigarettes may in fact use counterfeit stamps, hijacked trucks, or other nefarious means, including actual bribery of law enforcement. However, some “smuggled” cigarettes are simply normal people shopping over state lines. Pinning down exactly how much cigarette smuggling is an organized attempt at mass tax evasion versus consumers shopping for a good price can be quite tricky.
Enforcing anti-smuggling laws is thus difficult, and could be costly. The exact cost of enforcement is virtually unknown, as very few states publish public data on how much money is spent specifically enforcing tobacco excise tax laws. But if spending on policing of drugs and alcohol is any clue, the bill for states to increase enforcement would be substantial.
While the study authors suggest that the problem of cigarette smuggling could be addressed by raising taxes in low-tax states, or increasing enforcement, these are not sound options because raising taxes to combat smuggling is just pushing on the brakes and the gas pedal at the same time. If low-tax states raise taxes, it’s true that the incentive to smuggle between states would fall. But exorbitant cigarette taxes in states like New York can amount to de facto prohibition, which, as we know from historical experience, only creates even bigger black markets. A problem created by high taxes will not be solved by more high taxes.
Relatively high excise taxes create high profits for people who are willing and able to break the law, regardless of whether they evade taxes by shopping across borders, exploiting the tax status of tribal lands, or engage in black market production, as under Prohibition. This in turn creates new burdens on law enforcement. Indeed, strict enforcement of laws against cigarette smuggling has not always been effective, often adding a significant burden to law enforcement agencies with little value added for the community.
Cigarette smuggling is, at its root, a tax problem. It’s a problem of some states singling out smokers because they are a politically unpopular group, and subjecting them to excessively high tax rates. But the solution to the problem of cigarette smuggling is not to export that bad tax policy to more states in the form of higher taxes, or to pursue cigarette smugglers with the same zeal as drug smugglers; it is to lower taxes and deprive smugglers of the environment that makes their crime profitable.
Read more on cigarette excise taxes here.
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