Cigarette Taxes and Smuggling 2010

An Update of Earlier Research

Download a PDF of the full report here.

Executive Summary

Between January 2007 and 2009, 21 of the 48 contiguous states — including tobacco state North Carolina — raised their cigarette taxes, producing a total of 27 tax hikes. In 2010, tobacco state South Carolina and five other states did the same. 

This study updates the Mackinac Center’s 2008 publication “Cigarette Taxes and Smuggling: A Statistical Analysis and Historical Review” to reflect state and federal cigarette tax hikes through fiscal 2009. The original study used data through fiscal 2006. 

Our new estimates indicate that in 2009, the state of Michigan ranked 10th in the nation* in smuggled cigarettes as a percentage of total in-state cigarette consumption — 26 percent. The five smuggling destination states with the highest cigarette smuggling rates were Arizona (51.8 percent of the state’s total consumption); New York (47.5 percent); Rhode Island (40.5 percent); New Mexico (37.2 percent); and California (36.3 percent).

According to our calculations, Arizona’s inbound smuggling rate was not in the top five in 2006, yet we estimate that Arizona now has the nation’s highest inbound cigarette smuggling rate, with over half of all cigarette consumption coming from smuggled sources. This is probably a function of the state’s 2006 excise tax hike, the 2009 federal excise tax hike and Arizona’s proximity to Mexico.

The study also breaks smuggling rates into two primary types of smuggling: “casual” and “commercial.”† Casual smuggling typically involves individuals crossing borders to obtain their cigarettes for personal use. It may also involve purchases made over the Internet. Commercial smuggling involves larger, typically long-haul efforts, such as transporting cigarettes from North Carolina (a typical source state) to Michigan or elsewhere.

In the casual smuggling category, Michigan’s smuggling rate ranks 5th in the nation, at 11.6 percent of total in-state cigarette consumption. Only New York (19.9 percent), Rhode Island (18.2 percent), Washington (14.5 percent) and Montana (13.2 percent) residents crossed into neighboring jurisdictions for lower-taxed cigarettes more often than those of the Great Lakes State. Remarkably, New York state earned the number one spot even before hiking state taxes by $1.60 per pack in 2010. Anecdotal evidence suggests that this recent hike has been a boon to Pennsylvania retailers just across the Empire State’s border.

The states with the top inbound commercial cigarette smuggling rates are New Jersey (29.1 percent); New York (28.5 percent); Vermont (24.2 percent); Massachusetts (23.3 percent); and Connecticut (20.9 percent).

Five smuggling destination states moved up by double digits between 2006 and 2009 in our state rankings of net smuggling rates: Texas, from 16th to 6th; Mississippi, from 37th to 22nd; South Dakota, from 28th to 12th; Maryland, from 24th to 9th; and Iowa, from 33rd to 15th. These large smuggling rate increases relative to those of other states can likely be attributed to the five states’ substantial state excise tax increases over the past three years. Texas increased its per-pack cigarette tax from 41 cents to 141 cents in 2007; Mississippi, from 18 cents to 68 cents in 2009; South Dakota, from 53 cents to 153 cents in 2007; Maryland, from 100 cents to 200 cents in 2008; and Iowa, from 36 cents to 136 cents in 2007.

Despite the notable cigarette tax hikes in recent years, other proposals are being floated around the country. In 2009, Michigan Gov. Jennifer Granholm suggested raising cigarette taxes to $2.25 per pack, up from $2.00 per pack. That proposal never came to fruition, but we estimate that had it become law, illicit cigarette trafficking would have leapt to 28.3 percent of Michigan’s total cigarette consumption. In Illinois, according to our calculations, a proposed $1.00-per-pack cigarette tax hike would cause cigarette smuggling to increase from a modest 5.9 percent of total in-state consumption to 24.3 percent.

Smuggling is not the only unintended consequence of high cigarette taxes. Tax-induced smuggling can also lead to violence against people, police and property, and encourage sizable and brazen theft. The authors recommend reducing state and local cigarette taxes as a way to thwart smuggling and other unintended consequences. 

 

* Our model provides cigarette smuggling estimates for 47 of the 50 states. Hawaii, Alaska and North Carolina (a premier source of smuggled cigarettes) are excluded from the results.

† A third type of smuggling is estimated as well: smuggling imports from Mexico and smuggling exports to Canada. In our model, such estimates primarily affect border states.