Tax policy can have unexpected consequences. To take one example, high excise taxes on cigarettes have fueled small- and large-scale smuggling, theft, counterfeit products and violence against both civilians and police. Policymakers should take note: Consumers do not eagerly await to pay more in ever-higher taxes. They change their behavior, often in ways that undermine the goals tax advocates hope to achieve.

Michigan ranks 17th among the 48 contiguous states through 2024 for the rate at which cigarettes are smuggled in from other jurisdictions. This amounts to 17% of total in-state consumption, according to our latest analysis. New York is the nation’s leading cigarette-smuggling state. We estimate that 61% of cigarettes consumed in the Empire State in 2024 were the result of tax evasion and avoidance.

Cigarette tax rates are a major driver of smuggling. The top five inbound smuggling states — those receiving cigarettes brought in to evade some or all taxes — were New York (61%), California (54%), Massachusetts (38%), New Mexico (38%) and Washington (37%).

New York raised its cigarette excise tax by $1 per pack to $5.35 in January 2024, causing it to surpass California and reclaim the top spot for in-bound cigarette smuggling. New York's smuggling rate is driven in part by New York City’s additional tax of $1.50 per pack.

Geography matters, as New York demonstrates. If many people live in a state’s border counties, that makes it easier and less expensive for both consumers and organized traffickers to move cigarettes from lower-tax states. In 2024, New Jersey, which borders New York, taxed cigarettes at $2.70 per pack. Pennsylvania, another neighbor of New York, has an even lower rate of $2.60 per pack. Virginia’s tax is only 60 cents per pack, making trips into New York attractive for large-scale smugglers.

Native American reservations and international shipments also serve as sources of untaxed or lower-taxed cigarettes.

These factors inform the statistical model we developed for the Mackinac Center's first study of cigarette tax evasion and avoidance, which we broadly refer to as “smuggling.” The model compares legal cigarette sales with smoking rates reported in federal survey data. The difference between estimated consumption and legal purchases contributes to our smuggling estimates.

Our estimates of international smuggling from Mexico require an important qualification. We have long believed our model attributes some smuggling activity to Southwest states that should instead be assigned to bonded warehouses and duty-free shops. Unfortunately, we have not been able to obtain the data necessary to estimate the extent to which these institutions facilitate international cigarette trafficking.

Our model also identifies the states that serve as the largest sources of lower-taxed cigarettes for consumers and organized smugglers. In 2024, the leading outbound smuggling states were Wyoming (59%), Virginia (54%), New Hampshire (36%), Delaware (36%) and Idaho (28%). These states share a common feature: A relatively high percentage of the cigarettes sold within their borders are consumed elsewhere. For example, for every 100 cigarettes consumed in Virginia, an additional 59 are smuggled out. Wyoming borders six states. Its cigarette tax rate is 60 cents per pack, lower than every neighboring state except Idaho, where the rate is 57 cents.

Smuggling is not the only unintended consequence of high cigarette taxes. The illicit cigarette trade can be highly profitable, encouraging theft, counterfeiting and other criminal activity.

Last month, authorities charged two Massachusetts men who allegedly held people at gunpoint to steal boxes of cigarettes from a store in New Hampshire before fleeing in a U-Haul. The truck was later found abandoned and burning. YouTube news videos of other brazen robberies are easy to find. Given cigarettes’ street value, they function much like small gold bars, a currency in high demand.

Cigarettes can be so valuable to thieves that they need not be genuine. In May, U.S. Customs and Border Protection officers at the Port of Oakland seized nearly 53,000 cartons of counterfeit cigarettes with an estimated street value of $6.8 million. Counterfeit cigarettes are designed to resemble well-known brands but often contain higher levels of toxins than legally manufactured products are allowed. Some have been found to contain fillers such as sawdust.

Since the Mackinac Center published its first cigarette-smuggling study in 2008, it has documented numerous crimes connected to illicit tobacco trafficking, including murder-for-hire schemes, police corruption and acts of violence against both officers and civilians.

None of our smuggling estimates and related warnings should be interpreted as support for smoking. Neither of us has ever smoked cigarettes. We do not encourage our readers to smoke, and those who do should consider quitting.

Our point is simpler: Lawmakers should more carefully weigh the consequences of their tax policies. In some cases, the unintended costs may exceed the benefits policymakers hope to achieve.

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