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Study: Smugglers Help Smokers Evade High Cigarette Taxes

A new study finds a significant correlation between high state cigarette taxes and cigarette smuggling, suggesting the taxes may be having a perverse effect.

The study by the Tax Foundation, an independent tax policy research center, compares data from 2013 and 2006, and “finds that smuggling rates generally rise in states after they adopt large cigarette tax increases.” (RELATED: Cigarette Tax Increases Not Producing Desired Revenues)

Anti-smoking advocates at the Campaign for Tobacco-Free Kids claim on their website that, “Tobacco tax increases offer a win-win-win solution for states,” generating both increased revenue and improved health outcomes.

“Every state that has significantly increased its cigarette tax has enjoyed substantial increases in revenue, even while reducing smoking,” the group claims, adding that higher taxes “also save money by reducing tobacco-related health care costs.”

But “public policies often have unintended consequences that outweigh their benefits,” the Tax Foundation explains, and “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.”

Chart from Tax Foundation Study of Cigarette Smuggling

In New York, for instance, cigarette taxes have increased 190 percent since 2006, while smuggling has risen 62 percent. New York leads the nation in both categories, with a tax rate of $4.35 per pack and untaxed cigarettes making up an estimated 58 percent of the overall market.

The issue of cigarette smuggling in New York rose to prominence recently with the case of Eric Garner, who died after being placed in a choke-hold by police officers who accused him of selling “loosies,” or single cigarettes, from packs without tax stamps.

Smuggling increased even more dramatically in Illinois, where smuggled cigarettes grew from 1.1 percent of the market to 20.9 percent. (RELATED: Illinois Boost Cigarette Tax, Police Promise to Hammer Evaders)

“This is likely related to the fact that the Illinois state cigarette tax rate was hiked from $0.98 to $1.98 in mid-2012,” the Tax Foundation claims, adding that, “This increase in smuggling may continue in future data editions,” reflecting more-recent increases in county and municipal taxes.

Unsurprisingly, the states with the highest rates of outbound smuggling also tend to be those with the lowest cigarette taxes.

Of the 17 states with a net outflow of smuggled cigarettes in 2013, just two imposed taxes of more than $1 per pack, and both of those states — Pennsylvania and New Hampshire — are located near neighbors with relatively high cigarette taxes.

In contrast, of the 15 states in which smuggled cigarettes accounted for 20 percent or more of total consumption, just two impose taxes of less than $1.50 per pack, while eight tax cigarettes at $2 or more per pack. (RELATED: State-Funded Study: Cigarette Tax Hurts New York’s Poor Most)

“Smuggling takes many forms,” the Tax Foundation says, including “counterfeit state tax stamps, counterfeit versions of legitimate brands, hijacked trucks, or officials turning a blind eye.”

Among the examples of smuggling cited in the study were “a Maryland police officer running illicit cigarettes while on duty, a Virginia man hiring a contract killer over a cigarette smuggling dispute, and prison guards caught smuggling cigarettes into prisons.”

Various policy responses have been suggested to address the issue of cigarette smuggling, ranging from “differential tax rates near low-tax jurisdictions” to “cracking down on tribal reservations that sell tax-free cigarettes,” but the underlying problem remains, according to the Tax Foundation, because “high cigarette taxes amount to a ‘price prohibition’ of the product in many U.S. states.”

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