Cigarette excise taxes have been a constant topic of discussion in state capitols around the nation during the past two years.
It is not hard to imagine why. In December 2007, America slipped into the “Great Recession,” and state tax revenues plummeted across the nation.
Faced with a choice between cutting expenditures and raising taxes, some legislators proposed cigarette tax increases. The hikes were also promoted to the public as a way to improve public health. From 2007 through 2009, 21 of the 48 contiguous states — including tobacco state North Carolina — raised cigarette taxes, producing a total of 27 tax hikes. In 2010, tobacco state South Carolina raised cigarette taxes, as did five other states.[*]
But cigarette tax hikes can produce unintended consequences.
In December 2008, we published, together with a third co-author, a comprehensive 90-page study titled “Cigarette Taxes and Smuggling: A Statistical and Historical Review.”[†] The study, issued by the Mackinac Center for Public Policy, included a statistical model designed to estimate interstate and international smuggling in the United States, while also discussing cigarette tax-related violence, theft and financing of terrorism. This study updates those estimates and complements the original work.
[*] South Carolina, Hawaii, New Mexico, New York and Utah all raised taxes on July 1, 2010, and Washington State did so on May 1. Hawaii is scheduled to raise taxes again in 2011. As discussed below, these recent tax hikes are excluded from our new cigarette smuggling estimates because the complete dataset of state cigarette taxes runs only through fiscal 2009. The Aloha state is excluded from the estimates because it is not one of the 48 contiguous states.
[†] Michael D. LaFaive, Patrick Fleenor, and Todd Nesbit, “Cigarette Taxes and Smuggling,” (Mackinac Center for Public Policy, 2008), 1, http://www.mackinac.org/archives/2008/s2008-12.pdf (accessed December 10, 2010). The third coauthor of the study was Patrick Fleenor who is principal at Fiscal Economics, a Washington, D.C.-based consultancy.