Last week, the Mackinac Center for Public for Public Policy released its latest estimates of cigarette tax evasion and avoidance (what we call “smuggling”) for most U.S. states. We ranked Michigan 15th worst among 47 states for smuggling. Nearly 20% of the state’s cigarette consumption is illegal. That’s down from its all-time high of more than 34%, but still too much.
At the moment, however, some states may be making things even worse. Massachusetts, for example, appears to have condemned itself to an explosion of additional smuggling by imposing an almost complete ban on the sale of menthol cigarettes. That prohibition took effect June 1. Worse, other states with long and troubled histories of cigarette smuggling, are also toying with a complete ban on menthol cigarettes, too. History, anecdotal experience and empirical evidence all suggest that this is a bad idea.
High cigarette taxes are a “prohibition by price” because, while cigarettes remaining legal, many governments have jacked up taxes on them so high that they spur illegal behavior, similar to what the U.S. experienced during Prohibition. That behavior includes rampant smuggling and other lawlessness, including violence against people, property and police, adulterated products, brazen thefts and even cases of murder for hire. Raising the costs of legal cigarettes creates more profit opportunities for selling them on the illicit market.
What then could possibly go wrong by outlawing a cigarette that makes up about 30% of all cigarette consumption? Plenty, particularly because these smokes are likely to ride into markets on existing smuggling supply chains. If states struggle to keep illicit cigarettes out of their states, indeed, out of their own prisons (cigarettes being just one form of contraband), how do law enforcement and other officials expect to keep it away from those who want it?
Consider California. This state has the second-highest rate of cigarette smuggling in our latest estimates, which use data through 2018. We estimate that nearly 48% of consumption there is already a function of tax evasion and avoidance. Its smuggling history is so notorious that California was only one of three states (with Michigan and New Jersey) the Mackinac Center chose to feature in its first smuggling study in 2008.
Its smuggling rate may be second in the nation, but its revenue losses top them all. We estimate that, absent smuggling, the Golden State’s treasury would have received $1.7 billion more in cigarette tax revenue than it did. If the state adopts a ban on menthol cigarettes, it will lose far more. We made some rough estimates using 2019 cigarette sales figures to give lawmakers an idea of just how much.
If California bans menthol cigarettes and 75% of all menthol smokes switch to other smokes, we expect the state treasury to lose almost $135 million from expected cigarette revenue. If 50% of menthol cigarette consumption is replaced by the legal products that remain, we expect the state to forego $269 million. If the substitution rate is 25%, we anticipate a decline in revenue of almost $404 million.
Perhaps the health outcomes of high cigarette taxes bans outweigh the state revenue losses, however, and this is a good deal for the public. But it’s unlikely.
In what may be the first empirical analysis of its kind, researchers in Canada have studied the fallout from bans on menthols. The study, titled “Intended and Unintended Effects of Banning Menthol Cigarettes,” looked at bans across Canadian provinces. The researchers discovered that while legal sales of the banned menthol smokes plummeted, there was also “increased non-menthol smoking among youths, resulting in no overall net change in youth smoking rates.” They also report that the menthol ban inspired many adults to purchase these products from First Nation reservations, where these bans did not apply.
It seems states are prepared to ignore the history lessons from Prohibition’s past and repeat it in the cigarette trade. Let us hope these public policies are rejected where they have been adopted and introduced and never make their way to the Great Lake State.
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