Michigan State Senator Offers Cigarette Tax Cut to Cut Smuggling

Michigan state Sen. Joe Hune has introduced a bill that would cut state cigarette taxes by $1.00 per pack. If adopted, this would represent a sea change in the thinking behind two cigarette tax hikes over the past nine years, which raised the per-pack tax from 75 cents in 2002 to $1.25 in 2004 and then to $2.00 in 2004. Michigan is currently tied for 11th highest cigarette tax in the nation, making it a target for lucrative smuggling operations. Importantly, Sen. Hune’s Senate Bill 517 would go a long way toward reducing cigarette smuggling and other negative unintended consequences.

Two separate Mackinac Center studies in 2008 and 2010 showed that two different types of cigarette smuggling have become rampant in the state: casual and commercial. Casual smuggling is basically just individuals making a run for the state border to obtain cheaper smokes primarily for their own use. Commercial smugglers not only operate on a much larger scale, but typically make their hauls from more distant states. Todd Nesbit and I estimated that in 2010 a whopping 26 percent of all cigarettes smoked in Michigan were of the contraband variety.

Behind these numbers, both Mackinac Center studies also detailed a raft of other unintended consequences, including smuggling-related violence against citizens, police and property. Right here in Michigan, there have already been incidents involving at least one close call for a police officer, multiple hijackings including one in which a citizen was shot, and thefts of tobacco products from a wholesaler. In one incident, men were running illegal cigarettes into the state with the intention of redirecting their smuggling profits to the Hezbollah terrorist organization.

Using the statistical model that Todd Nesbitt and I developed to measure smuggling in 47 of the 48 contiguous states, he was able to run an instant “what-if” scenario on the Hune tax cut proposal. This indicated that the percentage of smuggled cigarettes in Michigan would fall from 26 percent of the market to fewer than 16 percent.

Although state tobacco tax revenue would fall by around $333 million if the bill became law, this could be made up by adopting some of the many budget cut recommendations made by the Mackinac Center in recent years. More important, it would reduce illicit trafficking, reduce the potential for more crimes and violence and, oh yes, give consumers a break too.

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