Policy Implications

The purpose of our statistical analysis and related discussion on the relationship between cigarette taxes rates and illicit smuggling activity is not to determine optimal tax rates for states. Instead, we hope this report encourages policymakers and the public to consider the often unseen costs of raising cigarette taxes, such as increasing the profits of smugglers and encouraging more people to partake in illegal acts. Cigarette tax hike proposals should take into consideration the impact on government through increased revenue (although revenue losses are possible), the impact on public health through reductions in smoking, and the impact on law enforcement and society through increased smuggling.

It is our recommendation that lawmakers in states that already have high excise taxes on cigarettes take a type of economic Hippocratic Oath, and, first, do no more harm. Some states may even wish to roll back cigarette tax rates and offset any revenue losses they may experience with spending cuts elsewhere. This is arguably the most effective way of addressing the smuggling problem. Other states might want to close the gap between their cigarette taxes and those in nearby states. This could mean reducing taxes for some states and raising them for others. Either way, this would reduce the reward for violating state law by decreasing arbitrage opportunities for smuggling.

There is another vital reason to reduce the degree to which states feel compelled to impose excise tax rates on cigarettes: individual liberty. Politicians the world over have singled out smokers for their “sin.” The sin taxes imposed on their products — it is argued — is good for the consumer. It raises the cost to consuming a product that has been demonstrated to be unhealthy, and it simultaneously raises revenue that can be used for a wide variety of other government initiatives.

The flip side is of course that subjecting cigarettes and other tobacco products to hefty taxes is a soft version of prohibition and a restriction of consumer choice. As we noted in a 2008 report (citations in the original):

Our focus on taxes has meant that we have not dwelled on the risks of smoking. This does not mean we think tobacco usage is harmless for consumers. Rather, we believe our findings may help remind policymakers and the public that the debate over cigarette taxes would probably benefit from more nuance and balance.

Still, in many cases the urge to raise cigarette taxes seems to involve more than a cost-benefit analysis; it appears to be driven instead by a conviction that public policy should be used to eliminate smoking altogether. This is a moral conviction and deserves more than an accountant’s ledger in response.

Smoking has been linked to serious health problems, and there is no question that heavy cigarette consumption is a risky habit. People who do not like cigarette smoking have a right to refrain from it and exclude it from their property. Yet using taxes and new laws to make citizens give up smoking in their personal lives raises important concerns about individual freedom.

Cigarette smoking is only one of many risky behaviors that people enjoy. Others include driving cars, riding horses, skydiving, overeating and casual sex. High taxes on these activities might eliminate some health risks and reduce the associated health care costs, but people do not always behave as expected. They often enjoy an activity precisely because it involves some risk. They may respond to higher costs by seeking to avoid the costs, not the activity, even when avoiding the costs is illegal. After all, that risk may become part of the attraction.

It does not take much imagination, especially after America’s experiment with alcohol prohibition, to see that fighting this impulse could generate an intrusive enforcement regime and a growing disrespect for the law. Intrusiveness and lawlessness would be more than just unpleasant: They could undermine people’s pursuit of happiness. That pursuit may sometimes be erratic and wrongheaded, but it is part of the value and purpose of life. As U.S. Supreme Court Justice George Sutherland once said, “To give a man his life, but deny him his liberty, is to take from him all that makes his life worth living.”

As a society, then, we should be careful about marking people down for harsher tax treatment because they engage in certain personal activities. When taxation moves beyond a modest revenue measure, it can become a relentless social crusade, with each unintended consequence generating new reasons for more revenue and more enforcement.

Our fellow citizens deserve better than that. No matter how much we may want a tobacco-free America, a free America is important too.[49]