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(Editor's note: The following remarks were delivered by Michael LaFaive, director of the Morey Fiscal Policy Initiative, on Nov. 21, 2014, to the National Foundation of Women Legislators in Philadelphia. Some text below was taken from testimony by the author to a conference in Anchorage, Alaska, earlier this year.)
Good afternoon. My name is Michael LaFaive and I am director of fiscal policy for the Mackinac Center for Public Policy, a Michigan-based research institute. It is a pleasure to be here today to discuss a topic in which I have long had an intellectual interest: cigarette taxes, smuggling and other unintended consequences.
In addition to presenting a summation of my past research to you I will introduce other members of this panel and direct your questions to the proper respondent. I will also zealously guard your valuable time. We are here to be informative, not to hold forth like we’re engaged in a Congressional filibuster.
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 from that study.
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. As one example, my home state of Michigan had a smuggling rate of 27.6 percent in 2012, 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 that the trade in contraband cigarettes has many parallels to the era of alcohol Prohibition. Indeed, my co-author and I often refer to the high excise taxes in some states as “Prohibition by Price.” Products remain technically legal but prohibitively expensive, which leads to widespread illegal activity with many parallels to the era of the real Prohibition of alcohol.
The Mackinac Center for Public Policy is not the only institution that has studied the issue of smuggling. In the past two years several university scholars have used a fascinating technique for estimating illicit trade in cities: collecting discarded packs of cigarettes and tallying the origination of cigarettes based on their tax stamp.
In 2013 a team of eight scholars published a study of discarded cigarette packs in five cities — Philadelphia, New York, Boston, Providence and Washington, D.C. They found overall that between 30.5 percent and 42.1 percent did not bear a local tax stamp and were present as a function of illicit trafficking.
The authors’ also estimate that eliminating illicit trafficking could reduce youth smoking by up to 9.3 percent in New York. They also estimated that eliminating illicit trafficking would help these five cities collect $680 million to $720 million more in tax revenue.
(My colleague Todd Nesbit and I have made revenue loss estimates from smuggling on a state-by-state basis and those can be found on our web site.)
Similar discarded cigarette pack studies were done in Chicago, South Bronx, New York and both Ontario and Quebec, Canada. What is particularly fascinating about the 2009 Canadian studies is that researchers collected 11,000 discarded packs around 105 schools and determined that 24 percent of them in Ontario and 35 percent of them in Quebec were of the contraband variety. This finding is particularly ironic since many a tax hike has been sold as a vehicle for placing smokes out of students’ reach.
Both theory and evidence suggest that hiking excise taxes helps reduce smoking but not nearly to the degree people believe.
A study by economist Mark Stehr published in 2004 reported that up to 85 percent of the change in legal paid sales of cigarette consumption can be explained by tax avoidance and not by kicking the habit. His is not the only study to measure that type of response.
It is also worth noting that high taxes also channels people into different consumption chains, such as “roll-your-own” products, which may be more dangerous. People can regulate the amount of nicotine upward in roll-your-own smokes by avoiding filters.
Counterfeit smokes from overseas have also been known to host far more of the dangerous chemicals in cigarettes and contain filler such as sawdust and other items one would not want in a cigarette product.
What’s the solution to all of this? There’s probably not just one, but if I were forced to choose I would say it would be to reduce excise taxes on this legal product. I am not so naïve as to believe that idea has a ready constituency, but lawmakers could at a minimum take a smuggling Hippocratic Oath and promise to do no more harm.
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