A version of this essay will appear as Mr. Reed's monthly column for the November 2002 issue of Ideas on Liberty, published by the Foundation for Economic Education.

“In the great chessboard of human society,” wrote economist Adam Smith in The Theory of Moral Sentiments, “every single piece has a principle of motion of its own, altogether different from that which the legislature seeks to impress upon it.”

With monotonous regularity, legislatures are busy fine-tuning the lives and habits of millions of citizens—utterly oblivious, in most cases, to Smith’s time-honored wisdom. As if keeping the peace, dispensing justice, and protecting the nation from foreign aggressors were petty, part-time assignments, nanny state lawmakers are forever prodding us to moderate or abandon certain pastimes they say aren’t good for us (even if many legislators engage in those very pastimes themselves). And if in the process of altruistically prodding us they make a few bucks for their favorite government program, well, that’s just what the nanny state is really all about anyway.

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If Adam Smith were with us today, he could point to cigarette taxes as proof of what he wrote more than two hundred years ago. Armed with the rhetoric of moral righteousness, the Carrie Nations of the cigarette wars are jacking up taxes on smokes higher than smoke itself. It’ll discourage a bad habit, they tell us, as they spend the revenues at least as fast as they roll in.

This summer, New York City raised its municipal cigarette tax from eight cents a pack to $1.50. New York state imposes the nation’s highest per-pack tax at $1.50, which means that $3.00 of every $7.00 pack of cigarettes in the Big Apple goes just for the government’s take at the retail level. Never mind the baked-in hidden taxes from the tobacco farm to the local 7-Eleven that add even more to the retail price.

When Mayor Michael Bloomberg signed the latest tax hike into law at a news conference on June 30, a citizen tossed him a very cogent inquiry. According to The New York Times, Audrey Silk of Citizens Lobbying Against Smoker Harassment asked Hizzoner, “I know that you love to eat chunky peanut butter with bacon and bananas. How about I come out and start a campaign to tax that bacon that’s going to cause heart disease, and tax that super-chunky peanut butter that’s going to kill you?” After conferring with an expert at his side, the mayor essentially said that smoking was different because it’s addictive. Besides, the city’s deficit-ridden budget needed the expected $111 million a year the $1.50 per pack would yield.

Who’s really the addict here? I know of many people who have given up smoking. I don’t know of any politicians who have given up on gouging revenue from it.

Indeed, federal, state and local governments are the overwhelming reason why the average price of a pack of cigarettes has doubled in the past five years. In the mid-90s, my own state of Michigan tripled its tax from 25 cents to 75 cents. Then this year, it added another 50 cents. I hasten to add that my concern is not for my own pocketbook; I’ve never smoked anything but a paycheck. My first concern is personal liberty, which, if it means anything, surely means the right to enjoy risky pursuits like hang-gliding or even smoking as long as your actions don’t aggress against others.

But more to the point of this essay, the ever-higher taxes on cigarettes are counterproductive in certain crucially important ways. Like Adam Smith suggested, people are going to find ways to do what they want to do even if their friendly congressman would prefer that they didn’t. Cigarette taxes are producing some of the same effects that alcohol prohibition brought us in the 1920s and early ‘30s, and that drug prohibition is bringing us today.

In his 1963 book, "How Dry We Were: Prohibition Revisited," Henry Lee explained what happened between 1919 and 1933 when alcohol was banned: The law drove the production and consumption of booze underground, and people who wanted to either make or drink the stuff were driven to crime (and amazing creativity) to satisfy their desires. Profits in the trade soared, thanks to the ban itself. Smuggling became an art form. Likewise, today’s endless and costly drug war has produced side effects that even a diehard drug warrior can’t deny: an entire subculture that guarantees both violence and drugs to whoever wants them.

And so it is with cigarettes. It will be ever more so if taxes reach prohibitive levels. At least one legal loophole for avoiding the taxes is helping to keep the cigarette trade relatively peaceful for the moment: Native-American reservations can sell cigarettes tax-free and sales at their stores and Web sites are soaring.

Meantime, low-tax, tobacco-growing states like Kentucky and North Carolina are magnets for smugglers who buy smokes there and truck them to high-tax, high-price states like Michigan. Authorities concede that smuggling is on the rise. An untold and growing volume of tax dollars is being spent to fight it.

In a recent commentary for the Mackinac Center for Public Policy, researcher James Damask revealed an especially seamy and disturbing side of cigarette tax evasion. On July 21, 2000, 13 months before the World Trade Center attack, FBI agents raided a house in Charlotte, North Carolina, used as a smuggling base. Inside they found cash, weapons (including shotguns, rifles and an AK-47), documents written in Arabic—and cigarettes. Lots of cigarettes. Why? Because, Damask says, “the operation exploited the tax differential between North Carolina, which has low cigarette taxes at 5 cents a pack, and Michigan, with high taxes at 75 cents a pack” (now $1.25 as of August 1, 2002).

Apparently, the smugglers would drive the 680 miles from Charlotte to Detroit in a rented van with 800 to 1,500 cartons of cigarettes purchased with cash in North Carolina. The cigarettes would then be sold to convenience stores in Detroit, which sold them to customers. Authorities say that each trip—which required absolutely no special skills for the 13-hour drive—would net $3,000 to $10,000. The profits would then be shuttled back to Charlotte. The homeowner and recipient of the profits was a man believed to have ties to foreign terrorist organizations.

The lesson? Like Prohibition, high taxes lead to big profit opportunities for people who break the law, which leads to smuggling, which in turn invites some pretty nasty people into the business. Politicians who say they’re helping our health by taxing cigarettes so heavily are not counting all the costs of their effort with as much care as they count their tax revenue. And Adam Smith was right as rain.

"Politicians who say they’re helping our health by taxing cigarettes so heavily are not counting all the costs of their effort with as much care as they count their tax revenue."