Diminishing Returns to Smoke Taxes

June 1, 2005

A sufficiently high tax is economically equivalent to a legal prohibition. Both lead to falling tax collections and rising illegal activity as markets are pushed underground. Cigarette taxes are approaching this point in some states, as stories of lower-than-projected tax revenues and rising cross-border smuggling multiply.

The latest example comes from Oklahoma, which boosted its smoke tax from 23 cents to $1.03 per pack on January 1:

OKLAHOMA CITY — The state is not collecting as much money as projected from the increased tobacco tax.

Finance Director Scott Meacham says the state has collected about $23 million dollars, which is $48 million less than the $71 million expected to be raised by April 30th.

Meacham says … Indian smoke shops in the Tulsa area are importing lower taxed cigarettes from border states.

For more on how rising cigarette taxes mirror the effects of legal prohibition, see our previous work here and here.

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