Smuggling Smokes

Lindsay Fox, Ecigaretteviewed.com, CC BY-SA 2.0

Smuggling Smokes

Which U.S. States have the most smuggled cigarettes? New York still leads, but California is catching up. Staff Reports

It is an article of faith that American states with higher excise taxes typically have higher rates of illicit trade, or smuggling.

A new estimate of cigarette tax evasion and avoidance among the states released by the Mackinac Center for Public Policy confirms once again just where this concept stands in the 21st Century. It is based on data from 2017, the most recent year for which statistics are available.

Not surprisingly, New York continued to be the top in-bound smuggling state in the nation. Nearly 56 percent of all cigarettes consumed in New York were smuggled in from elsewhere. This is unsurprising, as the state’s excise tax of $4.35 per pack is tied for the highest in the nation.

California Second

Also unsurprising is the jump in the rankings by California. The state passed a $2 per pack tax hike in 2017, which contributed to the Golden State’s smuggling rate increasing to 44.6 percent, making it the second highest in the nation. After California, the top-ranked states for smuggling are Washington (42.8 percent), New Mexico (40.8 percent) and Arizona (39.3 percent).

Michigan ranks 14th in the nation, with 21 percent of all cigarettes consumed in the Great Lake State smuggled in.

The degree of cigarette tax evasion and avoidance in high-tax states is remarkable, said the study. “Smokers are obviously not lining up like cows to be milked or sheep to be sheared.”

The degree of cigarette tax evasion and avoidance in high-tax states is remarkable, said study co-author Michael LaFaive, senior director of the Mackinac Center’s Morey Fiscal Policy Initiative. “Smokers are obviously not lining up like cows to be milked or sheep to be sheared.”

The study, entitled “Smuggled Smokes: California Closes in on New York,” also looks at states that export cigarettes. These states typically have a lower excise tax. The update found that New Hampshire continued to export the most cigarettes; for every 100 cigarettes consumed, an additional 65 are smuggled out of the state.

“With current tax gaps, politicians of every stripe are giving people incentives to save a buck by crossing borders in search of lower-priced tobacco products,” said the study’s authors Todd Nesbit, professor of economics at Ball State University; Michael Lucci is vice president of state tax projects at the Tax Foundation in Washington, D.C., and LaFaive.

Where Big Money Is

Worse, they’re announcing to the world’s criminal class that there is big money to be made engaging in large-scale, long-distance and well-organized trafficking of illicit tobacco, they wrote. “Our research, conducted over years and peer-reviewed by other scholars, shows a direct connection between high excise tax rates and smuggling. New York and California may lead the nation in packs of untaxed smokes, but they are far from alone.

The degree of cigarette tax evasion and avoidance in high-tax states is remarkable, said the study. “Smokers are obviously not lining up like cows to be milked or sheep to be sheared.”

Other research shows that nationwide average noncompliance with cigarette tax laws is high.

“That phenomenon, and other problems related to tax evasion and avoidance, will likely only get worse as states like Michigan, Oregon, Rhode Island and others continue to go to the cigarette excise tax well.”

The solution? “Instead of continuing to hike taxes, officials in high cigarette excise tax states ought to consider lowering them to narrow the gap between their states and lower-taxed ones,” said Nesbit, Lucci and LaFaive.

Enormous Cost of Black Market

Another new report on illicit tobacco trade—this one limited to the European Union—reveals that in 2018, the black market for cigarettes in the EU cost governments a total of 10 billion euros in lost tax revenues and was equivalent in size to the total legal cigarette sales in the U.K., Austria and Denmark combined.

Compiled by KPMG, a global network of professional firms providing audit, tax and advisory services, the report said that overall illicit cigarette consumption levels remained stable compared to the previous year. However, the report found a more than 30 percent increase in counterfeit consumption—the largest amount recorded to date.

“Beyond damaging government revenues, harming legitimate businesses— including our own—and fueling crime in local communities, the availability of cheap, unregulated cigarettes on the black market undermines efforts to reduce smoking prevalence and prevent youth from smoking,” said Alvise Giustiniani, vice president illicit trade prevention for PMI, which commissioned the report. “For PMI to have impact in our drive to unsmoke the world, we must sustain our combined efforts to eliminate illicit cigarette trade, while ensuring responsible access to better alternatives for the men and women who would otherwise continue to smoke.”

The report estimated that in 2018, illicit cigarette consumption—i.e., the consumption of counterfeit and contraband cigarettes—in the E.U. was at 8.6 percent of total consumption, representing 43.6 billion cigarettes.

How Excise Tax Increases Could Affect Individual American States

The Mackinac study included estimates of the impact that proposed cigarette excise tax hikes will have on smuggling.

Among them:

• In Michigan, legislation has been introduced to hike the cigarette excise tax by $1.50. We anticipate a hike of this size to kick the state’s smuggling rate from just under 21 percent to 34.4 percent of the total market.

• In Illinois, Governor Jay Pritzker had recommended a 32-cent increase per pack for cigarettes from its current $1.98. But since then, the Senate president, John Cullerton, proposed a $1 increase. Our estimates indicate that Gov. Pritzker’s tax increase would kick up smuggling from 17.2 percent of the market to 22.1 percent. $1 increase would increase the smuggling rate to 31.7 percent.

• In Oregon, the current smuggling rate is relatively low at 4.4 percent, but that would leap under a $2 increase a pack (150-percent plus) in the cigarette tax rate to 38.4 percent of the total market.

• Nebraska is in the throes of a tax reform debate now that could include a 36-cent increase in the state excise tax on cigarettes to $1. Doing so would take the state’s smuggling rate from nearly zero (0.67 percent outbound) to 6.9 percent.

• In Rhode Island, Governor Gina Raimondo has included in her most recent budget proposal (released in January) a 25-cent increase in the cigarette excise tax to $4.50 per pack. This would raise the state’s smuggling rate from 31.2 percent to 38.1 percent.

“Unlike the first ‘what-if’ scenarios above, we expect Rhode Island to experience a net revenue loss from this tax hike of approximately $5.9 million as a direct result of tax evasion and avoidance,” wrote Nesbit, Lucci and LaFaive. [TI]