There is much to recommend in the
proposals of the new administration of Gov. Rick Snyder, particularly on fiscal
policy matters. He campaigned on significant business tax cuts and valuable
spending reform, and talked of reining in the state’s industrial policy empire
in favor of a fairer, across-the-board series of economic reforms. Perhaps his
most import recognition is that public employee benefits need be brought more
in line with private-sector levels.
It is our hope that the Legislature
agrees with Snyder and works to avoid budgetary quick fixes — such as cigarette
tax increases — that have marked previous administrations and other state
legislatures. The Mackinac Center has recently updated and expanded its 2008
study of cigarette taxes and smuggling, and we have found empirical and
anecdotal evidence that shows massive smuggling still exists along with other —
sometimes violent — unintended consequences.
The bottom line with cigarette tax revenue is that politicians are as addicted to it as some people are to nicotine.
Michigan taxes its cigarettes at
$2.00 per pack, tied for 11th highest in the nation. Because other states have
much lower taxes per pack, there exists opportunities to capture a large
portion of the tax differential as profit. Smugglers can acquire cigarettes inexpensively
in North Carolina, which has a tax of just 45 cents per pack, and resell them
in Michigan. North Carolina also does not require a tax stamp, which some
states use to provide evidence that taxes have been paid. This makes it is
easier for smugglers to affix stolen or counterfeit tax stamps from the states
into which the contraband smokes are smuggled.
In order to estimate the degree to
which smuggling occurs, we developed a statistical model to measure the
difference between legal paid cigarette sales and government survey data on
smoking rates. The difference between rates of sales and smoking is our total
smuggling rate. We also controlled for other important variables, such as
border county population and distance to North Carolina, and divided the output
by two types of smuggling: commercial (large, long-haul shipments) and casual,
which is typically cross-border shopping for personal use. As the reader will
note from the graphic, there is practically a marriage between high taxes and
high smuggling rates.
We found that 26 percent of all the
cigarettes consumed in Michigan in 2009 were smuggled into Michigan, a rate
that ranks the Great Lakes State 10th among the 47 contiguous states whose
smuggling rates we studied. Michigan ranks even higher (5th) for casual
smuggling at 11.6 percent of total consumption, beating out all other states
save New York (19.9 percent), Rhode Island (18.2 percent), Washington state
(14.5 percent) and Montana (13.2 percent).
Remarkably, Michigan’s smuggling
rate would have been higher had it not been for cigarette smuggling exports —
to Canada. Despite Michigan’s high cigarette tax rates, they appear to remain
an appealing alternative to Canadians. An amount equal to 3.5 percent of total
consumption in Michigan is smuggled into to the Great White North, according to
Aside from smuggling, there are
plenty of other unintended consequences that follow large cigarette excise
taxes. They include possible terrorist financing, property destruction, theft —
including brazen semi-tractor hijackings — and violence against police and
In our previous cigarette study, we
told the story of Mohamad Hammoud, who with compatriots ran contraband
cigarettes to Michigan. He used profits from the smuggling operation to help
fund Hezbollah, sending cash and equipment to Lebanon, including night vision
goggles, drilling and blasting equipment, stun guns and laser range finders. In
December 2010, Hammoud asked the government to reduce his 155-year sentence to
time served or no more than 15 years.
Just days after he appeared in
court to request a lighter sentence, the federal government arrested two men in
North Carolina suspected of cigarette smuggling and using proceeds from their
illicit activities to fund a terrorist front group in Yemen. One of those
arrested has family in Michigan. The threat of prison does not seem to be a
Smugglers are not just people from
out-of-state swarming Michigan to trade in contraband cigarettes. Our 2010 study
described just one Upper Peninsula smuggling team that bought or ordered more
than 40 million cigarettes from a federal undercover agent.
The bottom line with cigarette tax
revenue is that politicians are as addicted to it as some people are to nicotine.
Legislators in Michigan and elsewhere should balance budgets with cuts to
spending, not by indirectly subsidizing criminal activities.
D. LaFaive is director of the Morey Fiscal Policy Initiative at the Mackinac
Center for Public Policy. Todd Nesbit, Ph.D., is assistant professor of
economics at The College of Charleston and an adjunct scholar with the Mackinac
Center, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or
in part is hereby granted, provided that the author and the Center are properly