Don't Mess With Taxes

Osarugue Igbinoba via Unsplash+

We're just weeks from New Year's Resolutions. Most of them involve ending bad habits, like smoking.

Taxes already have helped here. Studies have shown people tend to give up this form of tobacco as the price of a pack of cigarettes increased due to states’ added excise taxes. That’s particularly true of young smokers who have less disposable income.

Other nicotine addicts, however, find workarounds. While this tactic may satisfy their cravings, it damages the smokers’ health, stresses our medical systems due to increased smoking-related illnesses, and costs states needed revenue.

Tobacco taxes tie smuggling: One of the costly tax bypasses is smuggling.

A study by the Tax Foundation found that states that experienced net inbound cigarette smuggling in 2022 lost more than $5 billion of potential tax revenue. Those in that situation since 2007 have forgone revenues totaling more than $79 billion over that period, notes the Washington, D.C., tax policy nonprofit.

The study, which the Tax Foundation conducts annually in conjunction with the Mackinac Center for Public Policy, estimates cigarette smuggling rates for each U.S. state and the District of Columbia .

The latest data is not a surprise. It shows, says the Tax Foundation, that there’s a strong positive relationship between cigarette smuggling and tax rates across the country. A primary driver of the amount of cigarette smuggling is the relative magnitude of a state’s excise tax compared to the rate imposed by surrounding states or foreign countries.

Basically, when states increase their cigarette taxes, smuggling rates increase, both in the form of increased purchases in neighboring states and through illicit international channels.

The Tax Foundation’s color-coded map below gives you an idea of where your state stands in the cigarette smuggling trade. It’s also interactive, so you can get additional information.

Where smugglers thrive: Cigarette tax rates deemed excessive induce substantial black and gray market movement of tobacco products into high-tax states from low-tax states or foreign sources.

So it’s not surprising that New York, where the state’s $5.35 tax added to each pack of cigarettes is the highest levy in the country, also has the most inbound smuggling activity. An estimated 54.3 percent of cigarettes consumed in the state were obtained from smuggled sources in 2022.

New York is followed by California at 46.7 percent; New Mexico at 41.2 percent; Massachusetts at 39.7 percent, and Washington state at 36.8 percent.

At the other end of the illicit cigarette trade, Wyoming has the highest level of net outbound smuggling at 49.2 percent of consumption. The next highest levels of outbound smuggling are in Delaware at 34.4 percent; New Hampshire at 31.4 percent; Virginia at 30.4 percent; and Idaho at 27.0 percent.

The Tax Foundation also points out that after Massachusetts and California imposed bans on flavored cigarettes, smuggling in those states skyrocketed.

The tax policy organization suggests that policymakers interested in increasing tax rates should recognize the unintended consequences of high rates. “Criminal distribution networks are well-established and illicit trade will grow as tax rates rise,” according to the Tax Foundation.

You also might find these items of interest:

• Kentucky cigarette tax seems to have reduced smoking
• Flavored cigar ban would lead to millions of lost tax dollars
• Forget marijuana, states already face costly smuggling of untaxed cigarettes

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