Trends in Estimated Smuggling Rates

Our estimates suggest that cigarette smuggling rates across the country have wafted downward a bit. Consider Michigan as an example. In our January 2009 revision of 2006 state smuggling rates, we estimated Michigan’s total net smuggling rate at just over 31 percent of Michigan’s total cigarette consumption. That is, for every 10 cigarettes smoked, three appear to have been contraband. In contrast, our current estimate for Michigan’s net smuggling rate in 2009 is just 26 percent.

There may be several reasons for this decline. First, in 2009, North Carolina raised its cigarette taxes by 10 cents per pack. Because North Carolina is our prototypical source state (as it is in much of the economic literature on cigarette smuggling), this tax hike reduced the interstate tax differentials, and our estimates of commercial — and thus total — smuggling rates declined.

Second, as we mentioned above, Canada increased its taxes in 2008 and thus spurred outbound trafficking from states such as Michigan. According to our calculations, Michigan exports to Canada between 2006 and 2009 increased by nearly 1.7 percentage points, to 3.5 percent. Such smuggling exports would lower the total net inbound smuggling estimates for Michigan, as it did other states exporting to Canada.