Cigarette smuggling would leap if big tax hike proposal adopted

By Aaron Rice
January 14, 2019

A proposal floated by a Mississippi coalition to increase the state’s cigarette excise tax by 221 percent — to $2.18 per pack — would result in a huge increase in tax evasion and avoidance, according to a recent statistical analysis.

If the increase is adopted, Mississippi will find itself surrounded by lower-taxed states, which will encourage cross-border shopping by individuals and large scale smuggling, too, among other undesirable consequences.

It was anecdotal evidence about cigarette tax evasion and avoidance, or “smuggling,” that led one of the authors (LaFaive) and two of his colleagues to estimate the degree to which cigarettes are smuggled between states, as well as from Mexico and to Canada. They estimate that through 2016, Mississippi’s smuggling rate was a mild 4 percent.

The estimate is built around their statistical model, which measures the difference between smoking rates published by the federal government for each state and legal paid sales. There are often yawning gaps between the two — the amount of cigarettes that should be smoked based on sales and the amount of smoking that actually occurs — and that difference is probably explained by smuggling.

The model can be used to make “what-if” estimates based on proposed changes in tax rates. At an excise tax of $2.18 per pack, smuggling would leap from 4 percent to 35 percent of the total market. That is, of all the cigarettes consumed in Mississippi after such a tax hike, 35 of every 100 cigarettes would be smuggled. The model also reports that 21 percent of all consumption would be a function of “casual” smuggling. Casual smuggling is represented by individuals who typically buy lower-taxed smokes elsewhere for personal consumption.

The degree of casual tax avoidance or evasion makes sense when you consider that Mississippi, at $2.18 per pack, would be surrounded by lower taxed states Tennessee (62 cents); Alabama (67.5 cents); Louisiana ($1.08); and Arkansas ($1.15). Consider too, that Missouri, which imposes a tax of just 17 cents — the lowest in the country — is only a short drive through Arkansas.

When tax rates vary substantially across state borders, that gives people an incentive to shop elsewhere for their smokes and for larger, organized crime cells to engage in large, long-haul smuggling operations.

For example, New York State imposes a state excise tax of $4.35 per pack, and New York City tacks on an additional $1.50. Nearby Virginia — a five-hour drive — imposes a tax of only 30 cents. It is this difference that consumers seek to save (and smugglers try to profit from) by acquiring lower priced, often illegal cigarettes. In New York, inbound trafficking is rampant and news stories about it are easy to find.

Just last November, the New York state attorney general announced a 242-count indictment involving 17 cigarette smugglers who moved over 18 million untaxed smokes into the Empire State. That’s just one cell and one bust. There have been many others. This is something Magnolia State lawmakers should consider before taking up legislation that could make  Mississippi’s smuggling look more like a New York racket.

Moreover, smuggling is not the only consequence of high cigarette taxes. Others include brazen theft of cigarettes from retailers and wholesalers, shipment hijackings, violence against people and police, cases of murder-for-hire, accidental deaths involving police pursuits and public employee corruption.

All of the risks associated with higher cigarette excise taxes could be worthwhile if they led to far more people kicking the habit. Research shows, however, that as much as 85 percent of the after-tax change in legal paid sales is a function of tax avoidance and not quitting. Cigarette sales may drop dramatically, but it does not follow that smoking rates do.

None of this should suggest that either of us wish to encourage smoking. Neither of us are smokers and we would discourage others from starting. But the data shows us that there are far more effective ways — including tobacco alternatives, non-combustion substitutes, and innovative harm-reduction products — to reduce smoking than raising taxes.

The evidence from around the country and elsewhere tells us that relatively high cigarette excise tax rates can produce every sort of mischief, including undermining the very health goals such taxes were adopted to address.

This editorial was co-authored by Michael LaFaive. He is senior director of fiscal policy for the Mackinac Center for Public Policy and author of “Prohibition by Price: Cigarette Taxes and Unintended Consequences,” a chapter in the book, “For Your Own Good.”


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