Prohibition by Price

The recent success of Ken Burns’ newest documentary, “Prohibition,” has Americans wondering how our nation could have been so foolish as to try and outlaw alcohol. Prohibition resulted in widespread lawlessness, inhibited honorable commerce, strained police resources and risked lives of bootleggers and civilians alike.

While we rarely hear calls for the explicit prohibition of cigarettes today, politicians in Olympia, Washington and other state capitols routinely practice “prohibition by price.” That is, they are attempting to drive the price of a legal product so high with “sin” taxes ($3.02 per pack in Washington)  that cigarettes are becoming — for all practical purposes — a prohibited product, and with all of the unintended consequences. Last month a state senator introduced a proposal to drive the price even higher with a new $1.00 per-pack tax hike.

The unintended consequences of which we speak include smuggling, violence against property and people (including police); government corruption and distribution of dangerous, adulterated products. Potentially worse, in several instances across the country cigarette smuggling has been used to generate profits for known terrorist groups such as Hezbollah. The state of Washington will only exacerbate these types of problems if it were to adopt the most recent proposal.

We have spent years studying the effects of excise taxes on cross-border economic phenomena and have twice published full statistical analyses of cigarette taxes and smuggling. We estimated in 2010 that more than 31 percent of all cigarettes consumed in Washington in 2009 were illicit, but that figure leapt to 43 percent when the state hiked taxes from $2.02 to $3.02 per pack.

Because Olympia pols are giving serious consideration to another $1.00 excise tax hike we re-estimated our model to reflect the proposed increase. The output shows that raising taxes by $1.00 per pack would increase cigarette smuggling to more than 53 percent of the total market.

This is a staggering amount of smuggling — an estimated 119 million packs of cigarettes annually. Based on our 2010 study results this would give Washington the highest smuggling rate in the country. What is all the more remarkable is that the figure would be nearly 5 percentage points higher if we had not subtracted out cigarettes from Washington state that are smuggled into Canada (Canada’s taxes are higher still).

Of course, smuggling illicit products across international and state borders is hardly the only parallel that can be drawn between cigarette prohibition and the actual era of Prohibition. Other examples include the involvement of organized crime; violence against law enforcement; theft; the sale of adulterated products (such as bath tub gin then and counterfeit cigarettes today partially filled with sawdust); and police corruption. Just last October, eight former and current duty cops in New York were arrested for cigarette smuggling, among other crimes.

In March, 2011 a federal corrections officer pleaded guilty to taking bribes for smuggling cigarettes into a prison. If government can’t keep illicit cigarettes out of prisons, how can pols in Olympia expect to thwart massive smuggling of contraband smokes into the state?

The one major difference between alcohol Prohibition and today’s illicit smuggling activities involves the use of smuggling profits in financing terrorist organizations. Last December United States Congressman Peter King of New York wrote in an Op-Ed for the website Politico.com that one federal investigation found “far too many examples” of a “terrifying nexus between cigarette smuggling and terrorism.”

In our last study we also detailed this connection and reported on an instance where Michigan-based smugglers actually imposed a 25 cent “resistance tax” on cartons of contraband smokes designed to support in part the Hezbollah resistance movement..

If alcohol Prohibition taught us anything, it is that consumers and taxpayers are not sheep lining up to be sheared. People will adjust their behavior based on the incentives they face. Unfortunately, those incentives often lead to harmful consequences that may outweigh any good government hopes to accomplish with its policies.

Legislators in Olympia should reject the latest cigarette tax hike grab in the name of public safety, among other reasons.