Michael LaFaive and Todd Nesbit: R.I. set to lose tobacco revenue

Increasing cigarette tax would be counterproductive

This article first appeared in the Providence Journal May 8, 2015.

The Rhode Island General Assembly is working toward a budget vote that may -- among other things -- raise excise taxes on cigarettes by 25 cents per pack. The increase will prove counterproductive from both a revenue and public health standpoint.

 We first estimated a statistical model in 2008 to measure the degree to which cigarettes are smuggled. It covers most American states and has since been updated with tax and population changes through 2013. Our model tells us that through 2013 Rhode Island’s total smuggling rate is almost 32 percent of the total cigarette market.

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 We used that model to estimate what would happen if Rhode Island’s next budget included a hike in the cigarette tax to $3.75 per pack, a 7.1 percent increase. Our model indicates that smuggling would leap to 39 percent of the market and net revenues from cigarette sales would actually decline by 3.9 percent, or $5.1 million.

 The reason for the decline should be obvious. Most people in Rhode Island who smoke today will simply turn to lower-cost alternatives, such as buying from vendors in Massachusetts, American Indian reservations, or on the Internet. Other people will roll their own cigarettes using loose tobacco.

 Ours is not the only study that examined cigarette smuggling in Rhode Island and found the practice to be problematic. A 2015 study by the National Research Council and the Institute of Medicine put Rhode Island’s 2012 rate at 23 percent, lower than our own estimate but still significant.

 Another study, first published in the journal Tobacco Control in 2013, collected discarded cigarette packages in Providence and examined their tax stamps. In most states, cigarette packs must bear tax stamps evidencing their legality. The study reports that 75.5 percent of discarded packs collected in Providence were from — wait for it — Massachusetts.

 The Bay State may not be known for low taxes, but cigarette taxes there are almost $1.00 less per pack than in Rhode Island, which inspires a lot of cross-border shopping. Individual smokers are not the only ones to transport cigarettes across borders; so do organized crime units, which work in volume.

 Many people in Rhode Island must be familiar with the 2013 arrest of seven individuals for allegedly moving some 30,000 cartons of cigarettes from Virginia over a two-year period. Two Rhode Islanders were ultimately sent to prison for their involvement in this smuggling ring that -- according to the Rhode Island Division of Taxation -- took some “dozen teams of federal and state law enforcement agents and officers” to bring down.

 You could make Rhode Island an actual police state and it would not prevent large-scale smuggling.

 In addition to the fact that the Rhode Island Department of Revenue probably won’t enjoy a net increase in cigarette tax revenues from a 25-cent excise tax hike, the state is unlikely to enjoy any new health benefits either.

 Rhode Island long ago reached the point at which the returns to health from increases in the excise tax start diminishing. The people who smoke at $3.50 per pack are likely to continue doing so at $3.75 because of their “strong preference” for the habit.

 A 2014 study titled “Do Higher Taxes Reduce Adult Smoking” in the Journal of Economic Inquiry finds that the strong preference for smoking may lead some people to turn to the illicit market or acquire cheaper brands.

 A 2004 study by economist Mark Stehr found that up to 85 percent of the after-tax change in the legal paid sales of cigarettes is a function of tax evasion and avoidance. In other words, the vast majority of smokers continue the habit; they just do so in ways that avoid the higher excise tax.

 Raising Rhode Island’s excise tax again would only lead to more problems than it is worth, including a net loss of cigarette tax revenue, an increase in lawlessness and little or no improvement in public health.