West Virginia Excise Tax Hike Proposal Invites Smugglers

How Raising Cigarette Taxes Could Increase More Than Revenue

Legislation currently before the West Virginia House would raise cigarette excise taxes by a dollar per pack and with it the amount of illicit smuggling of cigarettes to the Mountain State.

We have been estimating the degree to which cigarettes are smuggled from state to state since 2008, working in recent years with the Tax Foundation of Washington, D.C. Typically cigarettes are moved by individuals and organized crime units from low-tax states to higher-taxed states. Some states permit a small amount of legal cross-border cigarette shopping, so not all cross-border activity counts as illicit smuggling, though those transactions are swept up into our model.

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As a state with a low excise tax, West Virginia has long been a net exporter of cigarettes. That is, it was a source for trafficked cigarettes. We estimate through 2014 that almost 19.5 percent of all cigarettes consumed there were smuggled out to other states. That is, for every 100 cigarettes consumed in West Virginia, an additional 19-plus left the state.

A casual smuggler is typically an individual smoker who crosses into West Virginia to acquire less expensive cigarettes for personal consumption. This person might also acquire cigarettes over the Internet. The majority of West Virginia’s exports are a result of casual smuggling, and it’s not hard to see why. West Virginia borders five states, four of which have higher cigarette taxes. Ohio, Pennsylvania and Maryland tax their cigarettes at $1.60, $1.60 and $2.00 per pack, respectively.

The exports are a financial boon to the Mountain State, which collects $16.2 million in tax revenue from people who come from other states, buy cigarettes, and then leave.

We used our statistical model to run a “what-if” scenario on the proposed tax hike. It tells us that smuggling will be reversed from nearly 20 percent of all cigarettes exported to 10 percent imported. That is, for all cigarettes consumed in West Virginia going forward, we would expect about 10 percent of them to be brought in from elsewhere, primarily from Virginia. West Virginia would stop benefiting from smokers who visit from other states, and instead send more tax money elsewhere.

Our model also tells us that the type of smuggling that occurs will change, too. While casual smuggling plays a dominant role in exports today, we expect commercial smuggling to dominate after the hike. Commercial smuggling involves large, long haul and organized shipments. Despite the increase in smuggling, our model shows the net impact on West Virginia’s bottom line to be positive and generate more than $111 million in new revenue.

Along with new revenues, there will be increased costs, primarily associated with law enforcement. Those costs can considerable. Along with lost revenues from legal paid sales due to illicit trafficking, there are other unintended consequences associated with the illicit trade in cigarettes. They include but are not limited to violence against people, police and property and public corruption, too.

  • In 2013 in neighboring Virginia, three gunmen were apparently involved a gun-related death that may have been tied to cigarette trafficking, in which the victim was heavily involved.
  • In 2010, a Fairfax, Virginia man, Xing Xiao, confessed to his part of a deal involving a conspiracy to kill a man; Xing thought he had stolen 15,000 cartons of cigarettes from him.
  • In Warren, Michigan in 2013, police shot at cigarette thieves who were working to thwart capture, driving a getaway van and swerving at officers.
  • In 2012, a Prince George’s County, Maryland police officer was sentenced for his role in a smuggling ring that saw him using his county patrol car and uniform to escort illegal smokes to their destination.

These are just some of the examples we could list. If West Virginia insists on pursuing a $1 hike, we fear it is just the type of policy change that could bring such unfortunate acts closer to the Mountain State’s front door.

A better alternative is to not raise excise taxes at all or raise them by much less than a dollar per pack. The state will still gain revenue without gaining as much crime in the process.


Related Articles:

On Cigarette Tax Evasion, I Told You So

Updated Research Affirms Link between Cigarette Taxes and Smuggling

High Cigarette Taxes Lead to More Smuggling

LaFaive and Nesbit Op-ed Published in Lincoln Journal Star

Cigarette tax debate should include lawlessness