R.I. Cigarette Tax Hike Proposal to Cost State Money

Editor's Note: A version of this article first appeared in the Providence Journal on March 15, 2016.

Gov. Raimondo’s proposed fiscal year 2017 budget contains a line that if adopted would increase the excise tax on cigarettes by 25 cents a pack. Our calculations suggest that this would result in a net decline of cigarette-tax revenue by 6 percent ($7.6 million), due to the increased smuggling that would follow.

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We have, since 2008 and more recently with the Washington D.C.-based Tax Foundation, estimated the degree to which cigarettes are moved across state borders for the sake of tax avoidance and evasion. We use the catchall term “smuggling” but some states do tolerate a small amount of cross-border cigarette shopping by their citizens. Through 2014, we estimate that Rhode Island’s smuggling rate was a heady 24 percent. That is, of all the cigarettes consumed in the Ocean State, nearly a quarter were obtained elsewhere.

That places Rhode Island 19th among smuggling states in the nation. Remarkably, the net smuggling rate would be more than 4 percentage points higher had we not subtracted out cigarettes bought in Rhode Island and taken to neighboring states.

Our smuggling research is not the only of its kind. Using a slightly different method for estimating cigarette tax avoidance and evasion, the National Research Council and Institute of Medicine published a study last year — using data through 2012 — that tagged the state’s smuggling rate at 23 percent. Clearly, Rhode Island has a significant problem.

Our model is designed to compare published smoking rates with legal paid sales. The difference between the amount of cigarettes that should be consumed based on known smoking rates and legal paid sales in the state has to be explained somehow. We believe the difference can be explained by tax avoidance and evasion — that is, from cross-border smuggling, which includes purchases made on the Internet.

We used our model to “what-if” a 25-cent tax hike for Rhode Island. If this increase is adopted, total smuggling will increase to nearly 33 percent of all in-state consumption and revenue from the cigarette tax will actually go down.

Champions of these excise tax increases may be quick to point to a decline in legal paid sales and tax revenue and shout, “See, it is working. People are quitting!” They would be mostly wrong to do so.

One oft-cited 2005 study by economist Mark Stehr explains that as much as 85 percent of changes that we see after a tax hike can be explained by the practice of evading and avoiding taxes, not kicking the proverbial habit. Another 2014 paper published in the Journal of Economic Inquiry, “Do Higher Taxes Reduce Adult Smoking,” concludes the answer is very little.

The authors of that paper argue that people who are smoking now, after decades of shaming campaigns and tax increases in the country, have such a strong preference that they look to illegal markets or alternative (but still legal) sources to obtain cigarettes.

In addition to rampant smuggling, high excise taxes on cigarettes also come with a host of other, unintended consequences. These include everything from violence against people and police to violence against property in the commission of robberies; counterfeit and adulterated products; and substitutions by consumers of less healthy alternatives (filter-free roll your own cigarettes, for example).

We understand that most advocates of increasing the excise tax on tobacco mean well. They honestly believe they’re persuading a large number of smokers to quit and that the benefits of tax increases outweigh the costs. The evidence has been suggesting otherwise — especially in already high-tax states — for years.

A better tack for states like Rhode Island is to reduce its addiction to cigarette-tax revenue and avoid new tax increases, and even roll back the existing tax.