Lawmakers in Augusta, Maine, early this year were giving serious consideration to adopting cigarette tax hike by as much as $1.50 per pack. That is a 75 percent increase over the current rate. It does not appear that those early discussions bore fruit but it is worth examining the possible impact of such a hike.
Theory and evidence both support the notion that higher prices will reduce consumption, but not nearly as much as many tax hike proponents believe. Cigarette smuggling and other unintended consequences undermine the degree to which people quit and may actually increase the risks associated with some smoking.
We have studied the issue of cigarette smuggling exhaustively and have produced four different smuggling rate estimates for 47 of the 48 contiguous states since 2008. Our most recent estimates, released in February, indicate that on net balance more than 11 percent of cigarettes consumed in Maine in 2012 were smuggled into the state.
We also took pains to dissect the data into commercial and casual categories. Casual smuggling occurs when people cross over into another state to buy cigarettes for personal consumption. Commercial smuggling involves longer, larger shipments from distant states like Virginia or North Carolina. In Maine, commercial smuggling is the single source for smuggling into the state.
We used our 2012 statistical model to estimate what would happen to smuggling rates in Maine if the tax hike that had been discussed was adopted. We find smuggling would jump to more than 24 percent of total consumption. Commercial smuggling would still dominate the inbound traffic and the total would be higher if we did not subtract exports to Canada, which exceeded 5 percent. Despite the large increase in smuggling we still expect tax revenues to increase by $64 million.
As prices rise people will substitute less expensive alternatives, either legal or illegal, for legal cigarette products. Unfortunately, too many people and politicians will point to declines in legal paid sales of cigarettes after a tax hike and say, “it is working.” It is, but not nearly as well as people think. We’re not the only ones to make this observation.
- A 2004 article in the Journal of Health Economics by economist Mark Stehr argued that “up to 85 percent of the tax paid sales response” is from avoiding taxes rather than quitting;
- Michael Lovenheim’s 2008 study, “How Far to the Border,” zeroed in on casual smuggling and found that between 13 percent and 25 percent of consumers get their smokes in “border localities.” He concluded, “the central implication of this study is cross-border smuggling confounds many of the potential health and revenue gains from cigarette taxation”;
- A 2012 study published by the Centers for Disease Control noted that “certain smokers” are switching to different types of tobacco to avoid higher taxes. In other words people are substituting less expensive “roll your own” cigarettes or other options. The rolling option also leaves smokers with the opportunity to leave out filters, adjusting upward the amount of nicotine (among other items) ingested.
- A 2002 study titled “Putting Out the Fires: Will Higher Taxes Reduce the Onset of Youth Smoking” found that there were “weak or nonexistent tax effects” in their modeling work. That is “cigarette taxes and smoking onset are not strongly related.”
The scholars zeroed in on young smokers — from eighth grade through senior high — because that’s when a smoker is most likely pick up their habit.
In addition to all of this, it is important to put the activity of smoking into perspective. A 2011 study published by the American College of Cardiology showed that sedentary behavior (television watching, for instance) can be at least as harmful — perhaps more so — than smoking.
Why exempt TV watchers or computer users from the health debate and routinely go to the tobacco tax well, particularly when it is not as effective as people imagine? We are not making light here. Smoking harms health and higher prices lead people to quit but not nearly to the degree people believe. A better tack in this struggle might be to lower excise taxes and adopt better anti-smuggling enforcement mechanisms.
Michael D. LaFaive is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Todd Nesbit, Ph.D., is a senior lecturer in economics at Ohio State University and an adjunct scholar at the Mackinac Center.