Analysis: High Cigarette Taxes Contributing to Increased Smuggling Rates in Michigan, Elsewhere

One-quarter of Michigan’s total cigarette consumption in 2013 was smuggled into the state, according to Center analysts

For Immediate Release
Jan. 14, 2015
Ted O'Neil
Media Relations Manager

MIDLAND — The Mackinac Center for Public Policy today released its latest estimates for cigarette smuggling rates in 47 of the 48 contiguous states, including Michigan, which saw its overall rate drop 9.4 percent — from 27.6 percent through 2012 to 25 percent through 2013. Michigan still has the 10th highest smuggling rate in the nation. The analysis was written in concert with the Washington, D.C.,-based Tax Foundation.

This means that of all the cigarettes consumed in the Great Lake State in 2013, 25 percent were smuggled in.

“People don’t realize the degree to which government induces illegal and dangerous activity with bad policy,” said Michael LaFaive, director of the Mackinac Center’s Morey Fiscal Policy Initiative. “In this case, individuals cross borders for personal smokes and an organized, criminal class brings in contraband cigarettes by the van full.”

This is the fifth set of smuggling rate estimates published by Mackinac Center analysts. The first two studies were published in 2008 and 2010, and contained detailed histories of smuggling in Michigan and other states. The numbers were updated in 2013 and 2014.

The top smuggling rates in the nation — according to the Mackinac Center’s new study — include New York (58.0 percent); Arizona (49.3 percent); Washington (46.4 percent); New Mexico (46.1 percent); and Rhode Island (32.0 percent).

The largest increase in smuggling occurred in Illinois, which moved up 16 spots to 14th overall.

“We attribute this sizeable increase to recent hikes in cigarette excise taxes at the state, county and city levels,” said Todd Nesbit, a senior lecturer in economics at Ohio State University, co-author of the study and an adjunct scholar with the Center, said.

Since 2012, the state and Cook County (in which Chicago is located) have increased taxes $1 per pack and Chicago 50 cents. The cities of Evanston and Cicero, also in Cook County, impose separate taxes.

“Gary, Ind., with much lower taxes, is just 30 miles away from Chicago,” LaFaive noted.

The authors have cautioned lawmakers repeatedly that smuggling is not the only unintended consequence of imposing higher cigarette taxes. High rates can also contribute to violence against people, police and property (including theft and truck hijackings) and the production of adulterated and dangerous products. Several smuggling cases have even involved the financing of terrorist organizations.

“Lawmakers need to understand that poorly structured tax policy can have unintended, real-worl consequences,” said Scott Drenkard, co-author and economist with the Tax Foundation.


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