Michigan Cigarette Excise Tax Inducing Widespread Cigarette Smuggling, Other Unintended Consequences

Smuggled imports an estimated 34.4 percent of total cigarette consumption in Great Lakes State in 2006, according to study

For Immediate Release
Tuesday, Dec. 2, 2008
Contact: Michael D. LaFaive
Director of Fiscal Policy

MIDLAND - The Michigan cigarette excise tax of $2 per pack has made cigarette smuggling a profitable option for small-time bargain hunters and commercial traffickers alike, according to a new study by the Mackinac Center for Public Policy. The study's authors estimate that nearly 35 percent of all cigarettes consumed in Michigan in 2006 were smuggled in - more than half of Michigan's legal cigarette market.

"Lansing politicians should be wary of practicing prohibition by price," said Michael D. LaFaive, Mackinac Center director of fiscal policy and one of the study's three co-authors. "Cigarette taxes may reduce smoking somewhat and they may raise tax revenues, but they can also yield consequences similar to our failed experiment with liquor prohibition - smuggling, illicit consumption, adulterated products and violence against police and civilians alike."

The study contains smuggling estimates for 47 of the 48 contiguous states from 1990 to 2006 and in 2006 alone. The authors also estimate what percentage of the total market is generated from "casual" smuggling - typically an individual consumer crossing a state border in search of a good bargain - and large-scale "commercial" smuggling.

From 1990 to 2006, the annual estimated tax-induced smuggling as a percentage of total consumption in Michigan was 16 percent, the fifth highest in the nation. More than 6 percent of Michigan's total was due to casual smuggling and another 11.6 percent due to commercial smuggling. The top overall smuggling states during the 1990 to 2006 time frame were: California (24.5 percent), New York (20.9 percent) and Arizona (20.6 percent).

The smuggling estimates for the year 2006 alone were much higher, with rapid cigarette tax increases since 2001 fueling greater tax-induced smuggling activity. In 2006, the states with the highest estimated cigarette smuggling import rates included: Rhode Island (45.7 percent), New Mexico (42.4 percent) and Washington state (42.3 percent).

"The high smuggling rates in these states were of little surprise to us, given the large hike in cigarette excise taxes in some states this decade," said co-author Todd Nesbit, Penn State Erie economist and Mackinac Center adjunct scholar.

The authors' peer-reviewed, statistical model compares legal, per-capita sales of cigarettes from 1990 through 2006 with survey data from the Centers for Disease Control and Prevention on the percentage of smokers in each state. Apparent discrepancies between legal sales and smoking rates - for instance, relatively low sales in a heavy smoking state - are used to estimate smuggling import and export rates between states, including any imports or exports to or from Canada and Mexico.

The authors provide in-depth historical reviews of Michigan's, New Jersey's and California's cigarette smuggling experiences starting as early as the 1940s. The reviews suggest that cigarette smugglers can realize large profits: tens of thousands of dollars for a single vanload of cigarettes, and hundreds of thousands of dollars for a single truckload.

These sums represent a loss in estimated tax revenues to a state's treasury, but they have produced other unintended consequences, including a variety of crimes that have played out right here in the Great Lake State. They include:

  • financing a terrorist organization;
  • thefts of untaxed cigarettes, including truck hijackings;
  • thefts of state tax stamps;
  • counterfeiting of tax stamps;
  • property damage;
  • counterfeiting of name-brand cigarettes, which are replaced with adulterated products, including counterfeit cigarettes from China; and
  • violence against residents and police officers.

Co-author Patrick Fleenor points out that history is replete with anecdotes about the lengths people go to acquire products they truly want, and the lengths criminals will go to feed that demand. "The meeting of high demand and opportunities for large profits can produce every sort of pathology," Fleenor said. "A high cigarette excise tax is not a costless way to achieve policy goals."

The authors conclude by arguing against higher taxes and recommend cuts in states with cigarette excise taxes that are already high. They also point out that cigarette taxes are regressive, and that cigarette tax revenues are best spent on programs that mitigate the cost of smoking, not on general programs that would be more properly financed by general tax dollars.

The 95-page study can be found at www.mackinac.org/10005.

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