Casual Smuggling

States with the highest rates of overall smuggling do not necessarily have the highest rates of casual, commercial or international smuggling. In the category of casual smuggling, which involves smaller purchases, usually for personal use, the top five destination smuggling rates are in New York, 19.9 percent; Rhode Island, 18.2 percent; Washington, 14.5 percent; Montana, 13.2 percent; and Michigan, 11.6 percent.

The estimated casual smuggling rates are directly related to the excise taxes in neighboring states. In our 2008 study, we obtained private cigarette sales data, categorized by ZIP code, from a large Midwestern wholesaler. We were then able to see how distributor sales to Michigan’s border counties changed after Indiana and Wisconsin hiked their cigarette taxes by 44 cents per pack and 100 cents per pack, respectively.[12] These hikes meant that Indiana and Wisconsin’s cigarette prices, which had been considerably lower than high-tax Michigan’s prices, were only somewhat lower. Just as economic theory would suggest, the distributor’s cigarette sales to Michigan’s Indiana and Wisconsin border counties increased by 53.2 percent and 8 percent, respectively.[13] Residents of Michigan’s border counties now had less incentive to drive to Wisconsin and Indiana for cigarettes, and many began buying their smokes close to home.

Of course, large-scale casual smuggling tends to occur when a neighboring state has relatively low cigarette tax rates. Among these source states, Virginia tops the chart with the staggering estimate that 55.4 percent of its total in-state cigarette consumption is casually smuggled out of the state. Virginia’s cigarette tax rate is only 30 cents per pack, while Maryland’s is $2.00 per pack and the District of Columbia’s is $2.50 per pack.[*]

Graphic 4: Top Five Casual Smuggling Import and Export States by Percentage of Total State Cigarette Consumption (Legal and Illegal), 2009

Graphic 4: Top Five Casual Smuggling Import and Export States by Percentage of Total State Cigarette Consumption (Legal and Illegal), 2009 - click to enlarge

Notes: Estimates computed based on regression results presented in columns 3 and 4 of Graphic 12 (see the Appendix). The smuggling percentage is negative when the state is a net importer of smuggled cigarettes, and the percentage is positive when the state is a net exporter of smuggled cigarettes. The sum of commercial, casual and Canada/Mexico smuggling does not equal the totals presented in the final column due to the nonlinear nature of the model. North Carolina, Hawaii and Alaska are not included.

As we noted in our 2008 study, casual smuggling also occurs over the Internet. Some overseas websites actually advertise the fact that they are not allowed to share their customers’ purchase and contact data with taxing authorities outside their own nation.[14]

In 2010, President Barack Obama signed the Prevent All Cigarette Trafficking Act, which prohibits the United States Postal Service from delivering cigarettes through the mail, among other restrictions.[15] This is not the only law on the books designed to thwart cigarette sales over the Internet,[†] but it is the newest. For instance, the Jenkins Act of 1949 mandates that American companies report sales information, including the quantity and the purchasers’ names, to states into which they have shipped their products. States have used this law to track their residents’ out-of-state cigarette purchases and to demand the state cigarette taxes owed to their treasuries.[16]

Cigarette sales from foreign websites that sell cigarettes are not subject to the Jenkins Act. It remains to be seen how the new federal Prevent All Cigarette Trafficking Act will affect these sales. The site is already advertising that it can help smokers beat the PACT Act with its private delivery system. Graphic 5 shows a screen shot from the website, which practically taunts federal authorities with its willingness to assist smokers in evading taxes.

Graphic 5: Website on “How to BEAT the PACT Act”

Graphic 5: Website on “How to BEAT the PACT Act” - click to enlarge

[*] Although our model did not include smuggling into the District of Columbia, other researchers have estimated it to have very high inbound smuggling rates. One study estimated the District of Columbia’s inbound smuggling at 18.45 percent of its cigarette consumption (see DeCicca, Kenkel, and Lieu, “Excise Tax Avoidance: The Case of State Cigarette Taxes,” NBER Working Paper Series (2010): 53, Table 2.); a second study placed it at 63 percent (see Lovenheim, “How Far to the Border?: The Extent and Impact of Cross-Border Casual Cigarette Smuggling,” National Tax Journal 61, no. 1 (2008): 29.). While the two estimates vary widely, both sets of researchers, using different methodologies, placed Washington, D.C., at or near the top of U.S. smuggling rates, with Lovenheim ranking it first in the nation, and DeCicca et al. ranking it second.

[†] For a fascinating paper on Internet-based cigarette sales, see Austan Goolsbee, Michael F. Lovenheim, and Joel Slemrod, 2010, “Playing with Fire: Cigarettes, Taxes, and Competition from the Internet,” American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 131-54, February.

[12] “The Tax Burden on Tobacco: Historical Compilation, Volume 44, 2009” (Arlington, Va.: Orzechowski and Walker, 2009), 9, 10.

[13] LaFaive, Fleenor and Nesbit, “Cigarette Taxes and Smuggling” (Mackinac Center for Public Policy, 2008), 84, http://www (accessed Dec. 10, 2010).

[14] LaFaive, Fleenor and Nesbit, “Cigarette Taxes and Smuggling” (Mackinac Center for Public Policy, 2008), 57, http://www (accessed Dec. 10, 2010).

[15] “The Library of Congress (Thomas): Bill Text, 111th Congress (2009-2010), S.1147.Enr” (Library of Congress) http://thomas. (accessed Dec. 12, 2010).

[16] Frank J. Chaloupk et al., “Enhancing Compliance with Tobacco Control Policies,” Stanford Working Paper Series, SAN08-07 (2008): 7.