How state taxes promote an underground cigarette market


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.
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