December 11, 2008

Give police a break: Leave the cigarette tax alone

This op-ed was published in the Orlando Sentinel on December 11, 2008.

Florida lawmakers face a budget shortfall of more than $2 billion, and the siren song of the cigarette tax once again can be heard.

“A dollar of additional tax on cigarettes could add $1.1 billion in new revenues,” says state Rep. Richard Krisemen.

Kriseman and others bemoan the fact that Florida’s cigarette tax hasn’t been raised since 1990. But history shows there is good reason for this. When the tax was higher than in other states, it proved nearly impossible to administer, bogging down law enforcement in an endless battle with bootleggers.

Criminals seized the opportunity to smuggle when the tax was enacted in 1943. North Carolina had no tax at the time; so smugglers started trucking in untaxed cigarettes. Florida was inundated with newspaper ads and fliers offering smokers tax-free cigarettes from mail-order houses out of state. State legislators responded with more enforcement and a plea to Washington to curb mail-order cigarette sales, none of which proved effective.

During the next two decades, tax enforcers and evaders were mired in a stalemate. Tax rates remained somewhat constant, and so did evasion. Florida’s legal, tax-paid cigarette sales remained low despite large influxes of tourists.

This situation changed in the 1960s when politicians used the growing concerns over smoking and health as an excuse to raise cigarette taxes. A tax hike in 1963 caused sales to drop sharply compared with national levels as more bootleg cigarettes began flowing into the state. According to authorities, one source was commercial fishermen, some of whom began augmenting their incomes by smuggling from Puerto Rico and the Panama Canal Zone.

In 1968, Florida achieved the distinction of levying the highest state cigarette tax in the nation after the tax was raised to 15 cents per pack. The only place with a higher tax was New York City where smuggling-related crimes were ravaging the city. This prompted the head of the Tobacco Tax Council to point out it was now possible for bootleggers to “live in New York in the summer and Florida in the winter. Quite a nice life!”

By the early 1970s, evasion problems were horrendous. A major federal report found that Floridians were buying more than 200 million packs of untaxed cigarettes annually. The chairman of the state House Committee on Finance and Taxation said the situation “attracts criminals and generates a major source of crime.”

Florida’s response? Throw more resources at the problem. But nothing worked. Frustrated, Jackson Walter, the state’s chief cigarette tax collector told Congress, “[T]he smuggling problem takes up a lot of resources; frankly it diverts a lot of resources from jobs that the Legislature in our state otherwise intended these people to do.”

At the height of the smuggling epidemic in 1970, the state seized only 20,572 packs of illicit cigarettes, less than the number smuggled into the state each hour of the typical day.

This large illicit market, coupled with the inability of officials to enforce, helped discourage tax hikes for nearly two decades. This allowed inflation to decrease the excise to levels not seen since the early 1960s. By 1990, this de facto tax cut had greatly reduced large-scale evasion.

Unfortunately, lawmakers’ memories are woefully short. In 1990, the state again hiked its cigarette tax by more than a third. They were quickly reminded of the perils of excessive taxation when a predictable resurgence of smuggling caused sales of tax-paid cigarettes to drop by nearly 8 percent during the next two years. Since that time, inflation again has eroded the tax, and the state’s problems with smuggling have declined sharply.

Politicians like cigarette taxes for one reason: The burden falls on an unpopular minority, namely smokers. But as history so vividly demonstrates, this view is myopic. The corrupting influence of a large black market and the diversion of scarce law-enforcement resources into a protracted battle with bootleggers harm all Floridians.

Patrick Fleenor is chief economist of the Tax Foundation in Washington, D.C., and author of “Cigarette Taxes, Black Markets, and Crime” (Cato Institute, 2003).