How state taxes promote an underground cigarette market

March 20, 2014

Cigarette smuggling rates, by state. (Tax Foundation)

 

Want to make an easy $25,000? All you need is a car and willingness to smuggle cigarettes across state lines.

Inter-state cigarette smuggling is a lucrative business — one that underscores how differences among state taxes can produce multi-billion dollar side-effects. An average car can transport about 10 cases of cigarettes, according to the Bureau of Alcohol, Tobacco and Firearms. Load up with 10 cases in Virginia, home to the second-lowest state excise tax which comes out to $180 per case, and drive up to New York, home to the highest at $2,610 per case, and voila more than $24,300 in profit.


Cigarette taxes, by state. (Tax Foundation)

 

The effect of trafficking can be huge. A study last year of five northeastern cities found that roughly a third — maybe a little less, maybe a little more — of cigarettes in the cities were smuggled there.

In 2012, more than half the cigarettes consumed in high-tax New York were from out of state, according to February estimates from Michigan’s Mackinac Center for Public Policy, a think tank. (And mapped Wednesday by the Tax Foundation — see above.) The same was true in only one other state, lower-tax Arizona, which neighbors two even lower-tax states (as you can see below): California and Nevada.

In New Hampshire, almost a fourth of cigarettes were smuggled out, a higher rate  than in any other state according to the analysis. More than one in five cigarettes were smuggled out of five other states as well: West Virginia, Delaware, Virginia, Idaho and Wyoming.

The analysis underscores the effect of inter-state competition on taxes. Higher taxes are associated with higher rates of consuming smuggled cigarettes, as the Tax Foundation charted below.


(Mackinac Center for Public Policy; Tax Foundation)

 

Putting an end to trafficking could cut youth smoking by more than 9 percent in New York City, the authors of the 2012 study estimated. And it could save the five northeastern cities anywhere from $680 million to $729 million a year. In 2009, the head of ATF’s tobacco-diversion division told The Wall Street Journal that studies suggested states were losing an annual $5 billion because of inter-state cigarette smuggling encouraged by ever-rising taxes.

“The incentive to profit by evading payment of taxes rises with each tax rate hike imposed by federal, state, and local governments,” a Justice Department study that year found. And as the chart below shows, those taxes are only going in one direction: up.

(Government Accountability Office)
(Government Accountability Office)

 

Niraj Chokshi reports for GovBeat, The Post's state and local policy blog.
Continue reading
Comments
Show Comments
Most Read Politics

politics

govbeat

Success! Check your inbox for details.

See all newsletters