May 15, 2006

Higher Cigarette Taxes Mean More Smuggling

(The following article was originally published in the May 15, 2006 edition of the Corpus Christi Caller-Times.)

Here’s a puzzle for lawmakers: If the same percentage of Texans smoke as nationwide—20 percent—why are sales of tax-paid cigarette sales so much lower in Texas? The answer: Texans are smoking millions of bootleg cigarettes smuggled into the state to avoid the tax of 41 cents per pack. A tractor-trailer holds 200,000 packs, so the profit margin is awfully tempting.

Now the Texas Legislature has voted to hike the cigarette tax by a dollar a pack, adding $200,000 to the profit in that trailer full of bootleg cigarettes. If the biggest cigarette tax hike in Texas’s history passes, the smugglers will be all smiles.

Bootleg cigarettes Texas has a long history of cigarette tax evasion. Serious problems began in the early 1950s, but they got much worse after the state hiked the tax to 18.5 cents per pack in 1972 (about 87 cents in today’s dollars). Smugglers brought them in by the truckload from low-tax states, from Mexico and even from ocean-going ships, affixing counterfeit tax stamps and selling them retail.

Texas’ response was to spend more on enforcement. That yielded some violent clashes with smugglers but didn’t solve the problem. By the mid-1970s, federal authorities estimated that Texas’ daily influx of bootleg cigarettes was more than 700,000 packs.

This law enforcement nightmare discouraged legislators from additional tax hikes during the mid-1970s and early-1980s. This allowed the era’s high inflation to effectively reduce the tax, and therefore the smugglers’ profit, by more than half. By 1983 a federal report found that cigarette bootlegging in the state had declined dramatically.

Unfortunately, lawmakers’ memories are woefully short when it comes to the harmful effects of excessive taxation. Since 1985, tax hikes have raised the state’s cigarette tax to its current level of 41 cents per pack. Predictably, smuggling has surged and tax-paid sales have declined.

Tax evasion is by no means the only crime that will rise in the wake of a much higher cigarette tax. Cigarettes are often the product of choice for thieves since they’re quickly sold for cash in the black market. Other states that have hiked their cigarette tax rates by a dollar, as proposed in Texas, have endured crime waves that threatened innocent shopkeepers, truck drivers and clerks and even resulted in numerous murders.

Texas legislators may have thought that the big tax reform package would raise necessary revenue while causing the least harm to the economy.

Unfortunately, by ignoring lessons from the past, they have included a cigarette tax hike that will worsen what has always been one of the state’s most troublesome taxes.

Patrick Fleenor is chief economist of the Tax Foundation and author of “Cigarette Taxes, Black Markets, and Crime” published by the Cato Institute.