Mexico and Canada

In the model, we limited estimates of international smuggling to Canada and Mexico, because they are the major countries contiguous to the U.S. mainland.[*] As in our previous analyses, Mexico played a considerable role in the estimated smuggling rates of four states: Arizona, New Mexico, California and Texas. Indeed, almost 24 percent of New Mexico’s in-state cigarette consumption is estimated to have originated in Mexico.[†]

Canada plays a different role in American cigarette smuggling. Canadians are frequently acquiring their cigarettes in the United States — even, our model suggests, from relatively high-tax states.

According to our estimates, in 2009, 10 states “exported” smuggled cigarettes to Canada: Vermont, at 5.2 percent of its consumption; New York, at 4.9 percent; Maine, at 4.3 percent; Washington, at 4.1 percent; Michigan, at 3.5 percent; Idaho, at 3.1 percent; Minnesota, at 3.0 percent; Montana, at 2.8 percent; New Hampshire, at 2.3 percent; and North Dakota, at 2.1 percent. Our estimates for each state’s smuggling exports to Canada in 2009 are higher than our previous estimates for their exports in 2006.

Graphic 7: Top Four States in Smuggling From Mexico and Top Five States in Smuggling to Canada by Percentage of Total State Cigarette Consumption (Legal and Illegal), 2009

Graphic 7: Top Four States in Smuggling From Mexico and Top Five States in Smuggling to Canada by Percentage of Total State Cigarette Consumption (Legal and Illegal), 2009 - click to enlarge

Notes: Texas, New Mexico, Arizona and California were the only states calculated to have cigarette smuggling imports from Mexico. 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.

Our revised 2006 data study showed that only three states in the union — Maine, New York and Washington — had export rates to Canada exceeding 2 percent of the states’ cigarette consumption, and the rates barely exceeded that 2 percent threshold. Our estimates for 2009 suggest the smallest nonzero export rate is just above 2 percent.

The higher smuggling estimates for 2009 are driven by increases in Canada’s federal cigarette tax in 2008.[22] In addition, the province of Prince Edward Island increased its cigarette tax in 2008 and 2009,[23] while Nova Scotia increased its cigarette tax in 2009.[24] The U.S.-Canada tax differential has been further heightened by the two countries’ currency exchange rates, which have generally made the cost of American goods fall relative to the cost of Canadian goods in recent years.[25]

Other sources estimate high cigarette smuggling rates into Canada. For instance, a 2008 report from GfK Research Dynamics authored for the National Study for the Canadian Tobacco Manufacturers’ Council indicates that illegal cigarettes made up 32.7 percent of that nation’s cigarette market share, up from 22 percent the year before.[26] The same 2008 report also argued that the illicit market for cigarettes was almost 49 percent in Ontario,[27] where more than one-third of all Canadians live.[28] Citing the Royal Canadian Mounted Police, the National Coalition Against Contraband Tobacco writes that 90 percent of the contraband cigarettes originate in the United States.[29]

[*] Of course, Canada and Mexico are not the only source countries for international cigarette smuggling into the United States. As our 2008 report indicated, international cigarette smuggling is a widespread problem that produces the same unintended consequences as tax-induced interstate cigarette smuggling. For more on this subject, see “Tobacco Underground,”  (The Center for Public Integrity (accessed Nov. 16, 2010).

[†] Mexican tax rates were not included in the model; it is not clear that they have a significant impact on cigarette smuggling from Mexico. Smuggling across the U.S.-Mexican border is an organized crime activity, with the smugglers skirting Mexican law as well. Moreover, the real tax difference between Mexican states and U.S. states fluctuates with the currency exchange rate, even if no tax change occurs on either side of the border.

[22] “Tax Rates across Canada” (Nova Scotia Department of Finance, 2010), http://www taxratesacross.aspx (accessed Nov. 2, 2010).

[23] Kimberley Tran, “Comparative Tax Rates (2007)” (Nova Scotia Finance, 2007), finance/comparative_2007 .pdf (accessed Dec. 3, 2010); “Comparative Tax Rates for the 2008 Tax Year” (Nova Scotia Finance, 2008), finance/comparative_2008 .pdf (accessed Dec. 3, 2010); “Comparative Tax Rates for the 2009 Tax Year” (Nova Scotia Finance, 2009), finance/taxation/TaxRates2009 .pdf (accessed Dec. 3, 2010).

[24] “Nova Scotia Tax Information: Bulletin 5076” (Service Nova Scotia and Municipal Relations Program Management and Corporate Services Provincial Tax Commission, 2009), snsmr/pdf/ans-taxcomm-bulletin-5076.pdf (accessed Dec. 7, 2010).

[25] “USD/CAD (Usdcad=X)” (Yahoo! Finance) (accessed Dec.14, 2010).

[26] GfK Group, “Illegal Tobacco Sales: A Crisis for Canadians” (Canadian Tobacco Manufacturers’ Council, 2008), 5, http:// www.stopcontrabandtobacco .ca/pdf/2008gFk.pdf (accessed Oct. 20, 2010).

[27] Ibid., 7.

[28] “Indicators of Well-Being in Canada” (Human Resources and Skills Development Canada, 2010), http://www4.hrsdc .3ndic.1t.4r@-eng .jsp?iid=34 (accessed Nov. 23, 2010).

[29] “Contraband Tobacco in Canada: Time for Action” (National Coalition Against Contraband Tobacco, 2009), 8, http://www (accessed Dec. 7, 2010).