Cigarette tax hike will increase criminal activity

This op-ed was originally published in Tulsa World on April 27, 2016.

Raising the state tax on cigarettes by $1.50 per pack would result in a 700 percent increase in cigarette smuggling into Oklahoma, among other consequences.

Cigarettes are a legal product. Those who use cigarettes are usually those who strongly prefer them. The high taxes imposed on cigarettes in various states create profit opportunities for those willing to buy them in low-tax states and ship them to high-tax states for resale. Thus, the product is attractive to lawbreakers.

Research by the Mackinac Center for Public Policy, a Midland, Michigan-based research institute, estimates Oklahoma’s 2014 state cigarette smuggling rate of 2.4 percent. The low rate is likely a function of being surrounded by four higher-tax states. Any amount of cigarettes brought into the state is largely offset by folks from our neighbor states taking them out. That will change if the tax hike is adopted.

The Mackinac Center used its statistical model to estimate the change in Oklahoma’s smuggling rate if taxes increase 145 percent — from $1.03 to $2.53. Their model projects that it would jump to 19.2 percent of the market. That is, of all the cigarettes consumed here, almost one-fifth will be of the illicit variety.

The Mackinac Center’s model separates smuggling behavior into two parts: casual and commercial. Casual smuggling typically involves individuals crossing into some other taxing jurisdiction or buying smokes online. Commercial smuggling involves large, long-haul organized criminal syndicates moving and distributing cigarettes. This is where the Mackinac Center believes the majority of the new smuggling will come from.

These crime syndicates can move large amounts of product all over the country, and even outside it. Recently, NASCAR driver Derek White was arrested for his role in a large cigarette smuggling scheme that moved cigarettes from North Carolina (a popular source state) northward into Canada. Derek White is a member of the Mohawk tribe, located in Quebec.

The Mackinac Center’s statistical model accounts for the presence of American Indian reservations in a state, though it does not attempt to measure the specific degree of sovereign nations’ contribution to tax avoidance, evasion. Also, it does not attempt to quantify how much revenue nontribal businesses will lose when smokers increase their purchases from tribal businesses.

Some believe that tax compacts between states and tribes reduce the role played by reservations in smuggling, but that may be naïve. Squeezing one side of a balloon only expands the other. Stripping people of an incentive to shop for cheaper smokes at tribal smoke shops may do little to quash the ability of individual members to distribute them on their own accord. Also, since Oklahoma’s compacts generate $70 million in rebates to tribes, they provide an advantage for tribal cigarette and ancillary retail sales over nontribal businesses. (The rebates result in additional cash flow, thus making the cost of business lower)

States with high cigarette taxes have also encountered other problems. The high profits involved in tax avoidance have led to risky behavior. Thefts of cigarettes — including the hijacking of truck shipments — are more common than people realize.

Thieves have smashed brick walls of wholesalers and retailers with sledgehammers to steal cigarettes. In 2013, Warren, Michigan, police were forced to shoot at cigarette thieves who swerved their van directly at officers in an attempt to escape a confrontation. Even products acquired by innocent consumers have been shown to be counterfeited, and often with dangerous filler such as sawdust.

At a time when Oklahoma’s economy is reeling and Oklahomans are suffering job losses, we cannot afford to implement cigarette tax hikes that will increase criminal activity, artificially divert business from Oklahoma communities and hammer Oklahoman families.

Permission to reprint this blog post in whole or in part is hereby granted, provided that the author (or authors) and the Mackinac Center for Public Policy are properly cited.