MIDLAND, Mich. — The state of New York lost $1.1 billion in cigarette tax revenue as a result of cigarette smuggling, according to new data released today by the Mackinac Center for Public Policy. More than 54% of all cigarettes consumed in the Empire State were smuggled. New York continues to have the highest inbound cigarette smuggling rate in the nation.
The Mackinac Center’s updated estimate of state cigarette smuggling across the continental United States uses data through 2021. It measures the percentage of total cigarette consumption that can be attributed to tax evasion and avoidance. Michigan’s rate is just over 18.2%, ranking the Great Lake State 18th-worst of the 47 states studied.
California had the second-highest inbound smuggling rate (44%) and New Mexico had the third-highest (38%). In Massachusetts (inbound smuggling rate: 37%), a ban on menthol cigarettes led to a near doubling of the 2019 smuggling rate. As a result, the state leaped from having the 12th–highest rate to having the 4th-highest one. The state of Washington was fifth, also at 37%.
“When consumers are presented with an opportunity to save a buck, many will make a run for the border,” said Michael LaFaive, senior director of fiscal policy at the Mackinac Center. “States that are levying high excise taxes or banning products altogether in an attempt to curb behavior should be aware that many will simply find another way to purchase their products. This leads to less money in the states’ treasuries than there might otherwise be and an increase in trafficking.”
New Hampshire demonstrates this phenomena well. Research has consistently shown that the Live Free or Die State is a source of more-affordable cigarettes for border crossers. For every 100 cigarettes consumed in New Hampshire, an additional 34 are smuggled out, likely to neighboring states like Massachusetts.
Massachusetts was the first state to effectively ban menthol cigarettes, and it gives a glimpse into what could happen with a national ban. The Food and Drug Administration may announce a nationwide ban on menthol cigarettes as early as this summer. If that happens, Americans should expect a major uptick in transnational smuggling from places like China and Mexico.
“Have authorities learned nothing from the failed experiment in alcohol prohibition? Outlawing menthol cigarettes will only shout to the world that there are huge profits to be made smuggling that product into the United States,” said Todd Nesbit, an adjunct scholar with the Mackinac Center and co-author of the report. “For established drug smuggling networks, adding cigarettes to a supply chain will be an easy choice.”
The Mackinac Center has published its estimate in partnership with the Tax Foundation of Washington, D.C.
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