Editor's Note: This testimony was submitted to the New Jersey Senate on March 6, 2020. 

Members of the State Senate:

My name is Michael LaFaive, and I am an economist and senior director of fiscal policy with the Mackinac Center for Public Policy, a Midland, Michigan-based research institute. I am writing you today to submit testimony on my concern about the proposed 61% excise tax hike on cigarettes in the governor’s budget. For more information you may also wish to read my related op-ed at NJ.com, published last night.

My colleague, professor Todd Nesbit and I, have had a long-running interest in cigarette excise taxes and related tax evasion and avoidance, which we call, “smuggling.” We have produced several large studies on this subject, one of which — in 2008 — featured the Garden State prominently.

Our most recent estimates — using data from 2017 — indicate that this proposed excise tax rate will lead to a new smuggling rate of 42%. That is, if the proposed excise tax hike is adopted, more than 40% of all cigarettes consumed (legal and illegal) will be a function of smuggling. The increase in illicit trafficking will cause a net revenue loss to the state treasury of $47 million. This is obviously a far cry from the $200 million-plus gain that others expect.

Smuggling and revenue declines will not the be only consequence, as states like New York — and at one time, New Jersey — can attest all too well. Experience tells us that higher excise taxes will make each packet of cigarettes into a more valuable product for those willing to smuggle for personal consumption or profit.

High taxes turn cigarette packs into little gold bars for the world’s criminal classes. Brazen thefts, public corruption, violence and other troubles have followed high excise taxes (or outright bans) on popular products. The money to be made in an illicit trade on cigarettes creates every sort of criminal mischief.

One doesn’t need a Ph.D. in economics to understand why. Higher cigarette taxes in one state create more opportunities to save or make a buck by buying them in another state. The distance between New Jersey and Virginia is not that great, but the excise tax differential of $2.25 per pack is, and it will only grow should the governor’s proposal pass, giving criminals more incentives to engage in smuggling.

Perhaps you’ve seen headlines over the previous years involving Jersey-related busts:

• 2018: “21 People Indicted In $15 Million Tax Fraud Scheme That Forged Millions of Tax Stamps for Cigarettes from North Carolina.”
• 2017: “2 NC men arrested in $20M cigarette smuggling operation.”
• 2016: “Police Uncover Cigarette Sales Scheme in Newark, Authorities Say”

These are just a few examples. Expect a sharp rise in such stories should the tobacco tax increase be adopted.

For my part, I’d like you to know that neither I nor my fellow cigarette smuggling researchers have or do consume cigarettes, and we would discourage anyone from starting. Research shows that taxes are so high already those who still smoke have a very strong preference for doing so, and that preference is unlikely to be suffocated by a 61% hike in the state excise tax. What will happen instead is that many people will evade or avoid the tax, causing smuggling rates to rise and state revenues to decline.

Thank you for your time and attention.

Sincerely,