State lawmakers in Boise are contemplating a $1.25 tax hike on each pack of cigarettes to extract more revenue from already beleaguered taxpayers.
While cigarette tax hikes usually generate additional revenue for different units of government, they bring with them illicit activities, including smuggling by individuals and organized crime groups, violence against people and police and brazen thefts, too.
In December, 2010, we released a study of cigarette taxes and smuggling in the continental United States. The research included an estimate of the degree to which cigarette smuggling occurs in 47 states. In 2009, Idaho was a net exporter of smuggled cigarettes — nearly 6 percent of total consumption — to other states.
There are two types of cigarette smuggling: casual and commercial. Casual smuggling involves individuals who usually purchase small quantities for personal consumption. Commercial smuggling involves long-haul and large shipments, such as in vans and tractor trailers.
In Rhode Island, 19 percent of all the cigarettes consumed in 2009 were brought into the state just by individuals crossing a nearby state line for cheaper smokes. The same activity occurs in reverse in Idaho, which is surrounded by six states with higher excise tax rates, including Washington. All of these states no-doubt have smokers willing to shop in Idaho for cheaper smokes.
But what would happen to Idaho’s smuggling rate if excise taxes leapt $1.25 per pack? We estimate that the state’s net smuggling rate would reverse, moving from exporting 6 percent of total consumption to importing almost 29 percent. This is a reversal that will bedevil Idaho law enforcement, tobacco wholesalers and retailers and ultimately the state treasury, too.
What goes uncounted in even the most sophisticated analyses of smuggling is the cost to society itself. The cost of cigarettes in many states and their wide tax-based price difference has created a market for illicit activities.
In 2002 two North Carolina men were arrested for smuggling cigarettes and were found to be redirecting their profits in cash and military equipment to the Hezbollah, a known terrorist organization;
In Michigan, one wholesaler has lost cigarette-filled trucks to hijackings and his drivers were pistol whipped. In an unrelated incident thieves smashed through the walls of his property to steal cigarettes.
While visiting Canada in 2008 an elderly couple from New York was killed when a suspected smuggler being chased by police crashed into their car;
In March of last year a Virginia man pleaded guilty to a murder-for-hire plot over smuggled cigarettes;
Counterfeit cigarettes from China — which often contain dangerous fillers such as sawdust — continue to find their way into the states.
We recognize that smokers are easy political targets and that excise or “sin” taxes frequently raise revenue. Unfortunately, politicians don’t consider all of the costs of reaching ever deeper into consumer pockets.
By hiking cigarette taxes so dramatically politicians are effectively expanding — if not creating — a highly profitable illegal market in which thieves and other people of violence can thrive at the great expense to consumers and job providers alike.
n Michael D. LaFaive is director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Todd Nesbit, Ph.D., is assistant professor of economics at The College of Charleston School of Business and an adjunct scholar with the Mackinac Center.