MIDLAND, Mich. -- The Mackinac Center for Public Policy has released its yearly analysis of estimated cigarette smuggling rates. The report—which was conducted with the Tax Foundation—found that New Yorkers yet again consumed the most black market cigarettes in 2013, though Illinois saw a large increase in black market activity as well.
Authors Michael D. LaFaive and Dr. Todd Nesbit of the Mackinac Center, and Scott Drenkard, an economist with the Tax Foundation, analyzed statistical data to estimate smuggling rates for different states between 2006 and 2013. They found that black market consumption is almost intrinsically linked to high state excise tax rates, as evidenced by the fact that states whose smuggling rates have dropped often neighbor states that have enacted higher cigarette taxes.
“Public policies often have unintended consequences that outweigh their benefits,” the Washington, D.C.-based Tax Foundation said. “One consequence of high state cigarette tax rates has been increased smuggling as criminals procure discounted packs from low-tax states to sell in high-tax states. Growing cigarette tax differentials have made cigarette smuggling both a national problem and a lucrative criminal enterprise.”
The highest inbound cigarette smuggling rates are in New York (58%), Arizona (49.3%), Washington (46.4%), New Mexico (46.1%) and Rhode Island (32%).
Illicit trade in New York has increased by 62% since 2006. The state’s cigarette excise tax has also risen by 190% and New York now has the highest state cigarette tax of $4.35 per pack (plus an additional local New York City cigarette tax of $1.50 per pack).
Though the black market has long been a problem in New York, the Empire State may have some company: Illinois saw the largest smuggling rate increase, with black market cigarettes going from 1.1% of the market in 2012 to 20.9% of the market in 2013. The authors believe this jump was likely due to a state excise tax increase of $1 per pack, enacted in mid-2012.
“This increase in smuggling may continue in future data editions,” the report continued, “as more recent increases in both the Cook County rate (from $2.00 to $3.00 per pack, effective March 1, 2013) and the Chicago municipal rate (from 68 cents to $1.18, effective Jan. 10, 2014) have brought the combined state-county-municipal rate to $6.16 per pack of cigarettes, the highest combined rate in the country.”
The report also tracked states with high rates of outbound cigarette smuggling (where lower-taxed cigarettes are purchased to sell in higher-taxed states). 2013’s highest outbound smuggling rates were in New Hampshire (28.6%), Idaho (24.2%), Virginia (22.6%), Delaware (22.6%) and Wyoming (21%). In fact, for every 100 cigarettes consumed in New Hampshire, an additional 28 cigarettes were smuggled out of state.
The report concluded, "Rampant smuggling can be thwarted to a degree by cutting taxes, improving law enforcement operations or both. We strongly suggest the former route. Higher excise taxes are the root of the problem so lower ones should be at the forefront of a solution.”
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