Cigarette Tax Hike Brings Smuggling, Other Unintended Consequences

(Editor's note: This Op-Ed appeared in the Idaho Press-Tribune on March 5, 2012.)

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 around the country have generated additional revenue for different units of government, they have brought with them dangerous, illicit activities including massive smuggling by individuals and organized crime (some on behalf of a known terrorist organization), violence against people and police, brazen thefts including truck hijackings and a steady stream of counterfeit products, both of cigarettes and of tax “stamps.” Tax stamps provide evidence that taxes have been paid on the product of a particular state.

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In December, 2010, we released a comprehensive study of cigarette taxes and smuggling in the continental United States. The research included an estimate of the degree to which cigarette smuggling occurs on a state-by-state basis. As it turns out, in 2009 Idaho was a net exporter of smuggled cigarettes — nearly 6 percent of total consumption — to other states. How?

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, a whopping 19 percent of all the cigarettes consumed in 2009 were brought into the state 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, which has the third highest cigarette tax rate in the nation. 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 other states to importing almost 29 percent. This is a staggering reversal and one 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 estimates is the cost to society itself. The high cost of cigarettes in many states and their wide tax-based price difference with other states has created a ready market for mischief makers.

  • In 2002 two North Carolina men were arrested for smuggling cigarettes and were found to be redirecting their profits to the Hezbollah in the form of cash and military equipment. They are both serving time for financing terrorism. This was not an isolated incident;
  • In Michigan, one wholesaler has lost cigarette-filled trucks to hijackings and his drivers were pistol whipped. Thieves have smashed through the brick walls of his property to steal cigarettes. His security costs alone are now about 12 percent of his business operation;
  • While visiting Canada in November, 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. Moreover, smuggling is so rampant that smugglers have actually started their own brand, known as “Jin Ling.” These cigarettes have no legal market.
  • Cigarettes aren’t the only item that is counterfeited. Talented thieves are also working to reproduce the various tax stamps that states print to show evidence that taxes have been paid. These fake stamps are then glued to cigarette packs obtained illicitly to make them appear legitimate.

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. Consumers are not sheep lining up to be sheered. They will adjust their behavior to acquire products they want at the best price.

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.