Cigarette Taxes and Cigarette Smuggling by State

Download FISCAL FACT No. 421: Cigarette Taxes and Cigarette Smuggling by State

Key Findings

• Large differentials in cigarette taxes across states create incentives for black market sales.
• Smuggled cigarettes make up substantial portions of cigarette consumption in many states, and greater than 25 percent of consumption in twelve states.
• The highest inbound cigarette smuggling rates are in New York (56.9 percent), Arizona (51.5 percent), New Mexico (48.1 percent), Washington (48 percent), and Wisconsin (34.6 percent).
• The highest outbound smuggling rates are in New Hampshire (24.2 percent), Wyoming (22.3 percent), Idaho (21.3 percent), Virginia (21.1 percent), and Delaware (20.9 percent).
• Cigarette taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates increased in 30 states and the District of Columbia between 2006 and 2012.

Public policies often have unintended consequences that outweigh their benefits. One consequence of high state cigarette tax rates has been increased smuggling as criminals procure discounted packs from low-tax states to sell in high-tax states. Growing cigarette tax differentials have made cigarette smuggling both a national problem and a lucrative criminal enterprise.

Each year, scholars at the Mackinac Center for Public Policy, a Michigan think tank, use a statistical analysis of available data to estimate smuggling rates for each state.[1] Their most recent report uses 2012 data and finds that smuggling rates generally rise in states after they adopt large cigarette tax increases. Smuggling rates have dropped in some states, however, often where neighboring states have higher cigarette tax rates. Table 1 shows the data for each state, comparing 2012 and 2006 smuggling rates and tax changes.

New York is the highest net importer of smuggled cigarettes, totaling 56.9 percent of the total cigarette market in the state. New York also has the highest state cigarette tax ($4.35 per pack), not counting the local New York City cigarette tax (an additional $1.50 per pack). Smuggling in New York has risen sharply since 2006 (+59 percent), as has the tax rate (+190 percent).

Other peer-reviewed studies provide support for these findings.[2] Recently, a study in Tobacco Control examined littered packs of cigarettes in five northeast cities, finding that 58.7 percent of packs did not have proper local stamps. The authors estimated 30.5 to 42.1 percent of packs were trafficked.[3]

Smuggling takes many forms: counterfeit state tax stamps, counterfeit versions of legitimate brands, hijacked trucks, or officials turning a blind eye.[4] The study’s authors, LaFaive and Nesbit, cite examples of a Maryland police officer running illicit cigarettes while on duty, a Virginia man hiring a contract killer over a cigarette smuggling dispute, and prison guards caught smuggling cigarettes into prisons. Policy responses have included banning common carrier delivery of cigarettes,[5] greater law enforcement activity on interstate roads,[6] differential tax rates near low-tax jurisdictions,[7] and cracking down on tribal reservations that sell tax-free cigarettes.[8] However, the underlying problem remains: high cigarette taxes that amount to a “price prohibition” of the product in many U.S. states.[9]

(Click on the map to enlarge it. All maps and other graphics may be published and reposted with credit to the Tax Foundation.)

Table 1: 2012 Cigarette Tax Rates, Smuggling Percentages, and Changes Since 2006
State	2012 Tax Rate (per pack)	2012 Consumption Smuggled (positive is inflow, negative is outflow)	2006 Consumption Smuggled (positive is inflow, negative is outflow)	2012 Smuggling Rank (1 is most smuggling, 50 least)	Smuggling Rank Change Since 2006 (e.g., NY changed from #5 to #1, so rank changed +4)	Cigarette Tax Rate Change, 2006-2012
New York	$4.35	56.9%	35.8%	1	+4	+190%
Arizona	$2.00	51.5%	32.1%	2	+5	+69%
New Mexico	$1.66	48.1%	39.9%	3	-1	+82%
Washington	$3.025	48.0%	38.2%	4	+0	+49%
Wisconsin	$2.52	34.6%	13.1%	5	+13	+227%
California	$0.87	32.7%	34.6%	6	+0	No Change
Rhode Island	$3.46	32.4%	43.2%	7	-6	+41%
Texas	$1.41	31.4%	14.8%	8	+8	+244%
Utah	$1.70	27.7%	12.9%	9	+11	+145%
Michigan	$2.00	27.6%	31.0%	10	-1	No Change
South Dakota	$1.53	26.0%	5.3%	11	+17	+189%
Connecticut	$3.40	25.7%	12.3%	12	+10	+125%
Montana	$1.70	24.8%	31.2%	13	-5	No Change
Minnesota	$1.600	22.4%	23.6%	14	-4	+1%
Maryland	$2.00	20.2%	10.4%	15	+9	+100%
Florida	$1.339	17.9%	6.9%	16	+10	+294%
Iowa	$1.36	17.9%	2.4%	17	+16	+278%
New Jersey	$2.70	15.5%	38.4%	18	-15	+13%
Kansas	$0.79	14.7%	18.4%	19	-7	No Change
Colorado	$0.84	14.1%	16.6%	20	-6	No Change
Massachusetts	$2.51	12.7%	17.5%	21	-8	+66%
Oregon	$1.18	12.7%	21.1%	22	-11	No Change
Maine	$2.00	11.2%	16.6%	23	-8	No Change
Mississippi	$0.68	8.5%	-1.7%	24	+13	+36%
Arkansas	$1.15	8.0%	3.9%	25	+6	+95%
Ohio	$1.25	7.4%	13.1%	26	-7	No Change
Louisiana	$0.36	4.1%	6.4%	27	+0	No Change
Nebraska	$0.64	4.1%	12.0%	28	-5	No Change
Oklahoma	$1.03	3.1%	9.6%	29	-4	No Change
Illinois	$0.98	1.1%	13.7%	30	-13	No Change
Pennsylvania	$1.60	1.1%	12.9%	31	-10	+19%
Vermont	$2.62	-2.3%	4.5%	32	-2	+46%
North Dakota	$0.44	-2.5%	3.0%	33	-1	No Change
South Carolina	$0.57	-2.6%	-8.1%	34	+7	+14%
Tennessee	$0.62	-2.9%	-4.5%	35	+3	+210%
Indiana	$0.995	-3.6%	-10.8%	36	+7	+79%
Georgia	$0.37	-4.1%	-0.3%	37	-2	No Change
Kentucky	$0.60	-7.4%	-6.4%	38	+2	+100%
Alabama	$0.425	-7.7%	0.5%	39	-5	No Change
Missouri	$0.17	-11.7%	-11.3%	40	+4	No Change
Nevada	$0.80	-16.8%	4.8%	41	-12	No Change
West Virginia	$0.55	-20.6%	-8.4%	42	+0	No Change
Delaware	$1.60	-20.9%	-61.5%	43	+4	+191%
Virginia	$0.30	-21.1%	-23.5%	44	+1	No Change
Idaho	$0.57	-21.3%	-6.0%	45	-6	+0%
Wyoming	$0.60	-22.3%	-0.6%	46	-10	No Change
New Hampshire	$1.78	-24.2%	-29.7%	47	-1	+123%
Alaska	$2.00	N/A	N/A	N/A	N/A	+25%
Hawaii	$3.20	N/A	N/A	N/A	N/A	+129%
North Carolina	$0.45	N/A	N/A	N/A	N/A	+50%
District of Columbia	$2.86	N/A	N/A	N/A	N/A	+186%
Note: Alaska, Hawaii, North Carolina, and the District of Columbia are not included in the study. Cigarette tax rates have changed for some states since 2012. Source: Mackinac Center for Public Policy; Tax Foundation.

Note: Positive smuggling percentages are inflow to a state; negative percentages are outflow.

Source: Mackinac Center for Public Policy; Tax Foundation.

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