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.