(Editor’s note: The following is taken from comments delivered by Michael D. LaFaive to the Council of State Governments on Aug. 10, 2014, in Anchorage, Alaska.)
When I taught economics at Northwood University, I would introduce the “law of unintended consequences” with a story:
A woman buys a previously owned parrot and discovers afterward that her parrot routinely shouts “hey fellas, I’m a swinger.” Mortified, she takes this sinful parrot to her local priest for advice.
The priest stops her mid-explanation saying, “this is not a problem. I have two parrots that are profoundly pious. They say the rosary and pray all day long, rubbing their beads as they go.” She leaves the parrot and not long after it squawks, “hey fellas, I’m a swinger.” Just then, one of the priest’s parrots looks at the other and says, “Put your beads away, Harry, our prayers have been answered.
Excise taxes on cigarettes often facilitate great lessons in the law of unintended consequences but the related stories usually aren’t as funny.
My colleague Todd Nesbit and I have worked hard to statistically measure the rate at which cigarettes are smuggled in 47 of the 48 contiguous states. Our first study was published in 2008 and ran to 90 pages. Our most recent, published this year, relied on a dataset that ended in 2012. Here are some of the findings:
New York was the number one inbound smuggling state in our survey, with nearly 57 percent all the cigarettes consumed in the Empire State being smuggled in. Ours is not the only empirical analysis to suggest New York’s smuggling rate exceeds 50 percent. Arizona, New Mexico, Washington state and Wisconsin round out the top five smuggling states with rates ranging from 35 percent to 51.5 percent of the total market.
The reason for such rampant smuggling should be easy to see. This is not a pack of cigarettes so much as a little gold bar pursued by a criminal class (among others).
Our total smuggling numbers would be even higher for some states but we subtract out international exports to Canada. Michigan’s smuggling rate is listed at 27.6 percent, but only because we first subtract out the 3.3 percent of smokes illicitly exported to Canada.
We split our total findings into two major parts (casual and commercial smuggling). Casual smuggling is typically done by individuals crossing a border or shopping online for personal consumption. Commercial smuggling is marked by large scale, long haul and organized efforts.
The top five states for inbound casual smuggling included New York at almost 24 percent, followed by Washington state, Montana, Wisconsin, and Michigan. The number one state for casual smuggling in the other direction is New Hampshire. For every 100 cigarettes consumed there, another 30-plus are smuggled out.
The top five commercial smuggling states, according to our research, include New Jersey at 32.7 percent, followed by Vermont, Connecticut, New York and Massachusetts. (Incidentally, in 2011 the state of New Jersey estimated its total smuggling rate at 40 percent of the market, higher than our own estimate.)
Smuggling is not the only lawlessness associated with high excise taxes on cigarettes and OTP: violence against people, police, and property are so common the trade in contraband cigarettes has many parallels to the era of alcohol Prohibition.
Michael D. LaFaive is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich.