More Unintended Consequences of Cigarette Taxes

Excise Taxes on Cigarettes, by State (from Wikipedia)

We have been talking about drug dealing this week, and today we turn our attention to the smuggling of a legal drug product: cigarettes. Differential state tax rates on cigarettes have unintended consequences, which we have discussed before. “Tobacco Road” used to refer to central North Carolina with its tobacco production and four universities with nationally competitive basketball teams. Now it is beginning to be used as a reference to I-95, which runs from some of the lowest-tax states for cigarettes (Virginia) to some of the highest (New York):

Because Virginia’s tobacco tax is the second-lowest in America, gangsters buy cigarettes there in bulk and sell them at enormous profit in New York and other high-tax states. At a minimum, they pocket a big chunk of the difference between what Virginia adds in tax—30 cents a packet—and the higher rates imposed elsewhere. New York’s tax, at $4.35 a packet, is the highest in the country.

The federal Bureau of Alcohol, Tobacco, Firearms and Explosives estimates that sales of illegal cigarettes cost government—local, state and federal—nearly $10 billion a year. For the smugglers, profits are better than those from cocaine, heroin, marijuana and guns, according to a report in September by the Virginia State Crime Commission. Moreover, the penalty for doing it—a maximum of five years in jail, under federal law—is considerably lighter than for selling drugs. If the smugglers were trafficking in heroin, they would face life in prison.

As tax rates continue to grow while remaining uneven across states, incentives for smuggling appear to be growing:

In New Jersey, where a packet of cigarettes carries a tax of $2.70, about 40% of all cigarettes are smuggled in from other states, according to the New Jersey Treasury Department. Maryland, Virginia’s neighbour to the north, reported a fourfold increase in seizures of illegal cigarettes between 2010 and 2012, though one official described the haul as the tip of the iceberg.

Anti-smoking activists love high cigarette taxes. But so do smugglers.

Further reading: Bruce Yandle’s “Bootleggers and Baptists” theory (wiki, pdf, podcast)

3 thoughts on “More Unintended Consequences of Cigarette Taxes

  1. In Canada, we’ve had cigarette taxes across the country since . . . probably the 70s or early 80s at least. In spite of smuggling (from the U.S.) and a lack of taxes on Native reservations, there has been a drastic decline in smoking over the time the taxes have been in effect. I did not think much of all the government pressure on what people were allowed to do when they came in and were raised to the extreme level they are at, but the results are great. I don’t think the solution is to get rid of the taxes, but rather, to get the states that don’t have adequate taxes to get on board with the goal of reducing the well-known death and destruction caused by smoking.

    Also, as I’m sure has occurred to you, the economic impacts and health care costs of smoking are a drain on the whole economy, and why not have the smokers/tobacco companies pay for them.

    • I agree with you that taxes should be equalized (or at least closer than they are now) betweeen states. Right now there’s no way for the federal government to enforce that, though.

      You’re also right to point out that the main reason for high taxes is to get people to engage in that behavior less. Unfortunately addicting goods like cigarettes (or alcohol, or junk food…) tend to be relatively price inelastic–some people will be responsive to increases, but it can take many years (as in your example) to see substantial effects.

      I also like that you bring in health care costs. There will probably be surcharges for smokers under the Affordable Care Act (and likely there already are for private health insurers–I am a non-smoker so I don’t know). But a more direct way to impose costs of their behaviors on the smokers would be to make them pay for their own treatments out-of-pocket. But health care politics tends to be a dicey field so I try not to stick my nose into it… too often. Thanks for your comments!

      • So true–I agree smokers should somehow end up paying for their behaviour–or “big tobacco”. And yes, a public health care system will take years to evolve and shape itself, just as ours has.
        Humans, a real work-in-progress.

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