Policy Implications

What conclusions might state policymakers draw? In states where cigarette excise taxes are already high or a tax hike would make them so, policymakers should consider refraining from further tax increases given the higher societal cost of increased smuggling, the higher cost of crime control and the diminished value of the hike in promoting smoking cessation. Ideally, policymakers should

feel particularly hesitant if the cigarette tax revenues are not meant to address the problems particular to tobacco use, but rather to finance programs that might be better shouldered by the general taxpayer. A better option may be to cut excise taxes to thwart smuggling and other unintended consequences.

Some have argued that states with lower cigarette taxes should raise them to reduce the interstate tax differential and the potential profits from interstate smuggling. It is true that a tax increase in these states will probably bring a higher benefit in additional tax revenues and smoking cessation than in a higher-tax state, while avoiding some of the increased risk of interstate smuggling.

Still, policymakers in these lower-tax states should consider that cigarette smuggling is not just an interstate phenomenon, but an increasingly international one. Raising state tax rates will make smuggling cigarettes from abroad more lucrative, since international smugglers can sell without charging either federal or state taxes. In addition, there is a question of priorities. State lawmakers' first purpose is presumably to serve their state's own residents. Trying to close interstate tax differentials is primarily an attempt to help other states address problems caused by their own tax and spending policies. This would link a state's sovereign taxing authority to the decisions of other governments and would do so at a disproportionate cost to the state's poor.

In light of the tax avoidance problems created by state cigarette tax differentials, some have questioned whether state excise taxes can work as intended. DeCicca, Kenkel and Liu argue the optimal state tax rate, given not just the health costs of smoking, but of cigarette tax avoidance as well, is just 78 cents per pack. As noted earlier, however, they acknowledge the impact of tax avoidance on the efficacy of state excise taxes and observe that it "points to the advantages of federal taxes." In theory, focusing on a federal tax approach could avoid some of the smuggling problems produced by large interstate tax differentials.[217]

At the same time, however, it is difficult to see how a federal cigarette tax could supplant state taxes. The federal government could not compel states to forgo their cigarette taxes, and state tax differentials would probably either remain when a higher federal tax was passed or re-emerge as time passed. Nor is it clear that the federal government would redistribute the cigarette revenues to the states commensurate to their health spending needs; the federal government has not, for instance, distributed federal gas tax revenues based only on states' demonstrated transportation needs, but rather according to various political considerations as well.[*]

[217] DeCicca, Kenkel and Liu.

[*] West Virginia, for instance, benefited disproportionately in the distribution of federal gas tax revenues, receiving far more in federal gas tax distributions than state motorists paid to the federal government. This mismatch was widely attributed to the influence of Sen. Robert Byrd, whose seniority on the Senate Appropriations Committee gave him considerable clout in determining federal road spending.