When Mackinac Center for Public Policy scholars embarked on a study of Michigan cigarette excise tax rates and related cigarette smuggling in 2007, they could not have dreamed where it might take them.
The most recent stop: Paris and the 9th Annual Eurasia Fiscal Expert Seminar at the Organisation for Economic Cooperation and Development. The study's co-author, Todd Nesbit, is a senior lecturer in economics at Ohio State University and an adjunct scholar with the Mackinac Center. He was asked to present Mackinac Center findings last spring in Paris and he did so to the great interest of his audience.
While in Paris, other organizations asked if he would consider speeches or roundtable discussions in the countries of Georgia, Ukraine and Russia. Nesbit’s invitation to Paris came after presenting the Mackinac Center’s cigarette tax and smuggling study results at the Vienna, Austria Tax Stamp Forum.
The remarkable interest these organizations have taken in the work of a state-based think tank is probably a function of Europe’s own rampant smuggling problem and the Mackinac Center’s unique and durable statistical model. Indeed, Nesbit’s Vienna invitation came after presenting our findings in Maryland, shortly after its January release.
Our model compares legal-paid sales per capita by state with reported smoking rates in those states. The difference, what we call a “residual,” is our total smuggling rate. The model is unique in its approach and has proven itself to be a robust work. The Mackinac Center sometimes uses the model to make forecasts about future smuggling rates and state revenue changes based on proposed excise tax increases.
One fairly recent forecast we made involved the state of Illinois. In May 2011, Kristina Rasmussen of the Illinois Policy Institute and I published an essay about the proposed $1 excise tax increase being considered by the Land of Lincoln.
We argued, based on the Mackinac Center’s statistical modeling work, that smuggling would leap to 26 percent of the total market in Illinois from just under 6 percent. At the time, Illinois officials expected new revenues of $320 million as a result of the increase in cigarette taxes.
We predicted a revenue change closer to $247.3 million in new revenues. Illinois adopted the excise tax hike despite our protestations and it has now been in effect for 12 months.
What happened to state excise tax revenues? They increased by $236 million, almost 26.3 percent less than what was predicted by Illinois state government. The actual figures were 4.7 percent lower than the Mackinac Center’s forecast.
Many people and politicians may point to the decline in sales and revenue and declare victory in Illinois. “See, people are quitting,” they will argue. That is true, but not to the degree people think. One scholars’ work in this field shows that as much as 85 percent of after-tax changes in cigarette sales may be attributed to avoiding higher taxes, and not from kicking the habit.
The Mackinac Center for Public Policy has produced three studies on cigarette smuggling since 2008. Each contains a statistical model designed to measure the rate of smuggling in 47 of the 48 contiguous states. In the 2013 analysis, Nesbit and I conclude that just over 29 percent of all cigarettes consumed in Michigan in 2011 were smuggled.