Cigarette tax debate should include lawlessness

Editor's Note: This article was originally published in The Oklahoman on August 25, 2017.

The Oklahoma Supreme Court has declared the state's new $1.50-per-pack fee on cigarettes to be unconstitutional. This means a special session could be in the offing to pass a new cigarette tax of equal measure. Any debate must consider whether the attendant lawlessness the higher tax would inspire — including widespread smuggling — would undermine its health goals.

Tobacco smuggling is common. It comes in two forms: casual and commercial. A casual smuggler is basically just a working stiff looking to save a buck buying lower-cost cigarettes in a different tax jurisdiction. Commercial smuggling typically involves large, long-haul shipments.

Through 2015, Oklahoma's total smuggling rate was a tiny 2.3 percent, compared with nearly 57 percent in New York. That will change dramatically if Oklahoma raises its cigarette taxes by 145 percent, to $2.53 per pack. According to my statistical model, a “what if” scenario involving $1.50 tax hike would cause Oklahoma's smuggling rate to leap to more than 20 percent of total in-state cigarette consumption. Roughly 80 percent of this would be commercial smuggling.

Why? A $1.50 tax increase would make Oklahoma smokes more expensive than in each of her five bordering states. Sooners might soon prefer buying smokes next door. Even if they don't shop elsewhere, there will be a ready supply of out-of-state cigarettes provided by organized crime because the illicit trade in smokes can be profoundly profitable.

Illicit smokes from Virginia have been found as far away as California. One shipment of illegal cigarettes confiscated in a New Jersey port, and also bound for California, originated in China.

Even successful NASCAR driver Derek White got busted for his part in a long-distance smuggling ring between North Carolina and Canada. There aren't enough “Buford T. Justice” types in all of Oklahoma to stop truckloads of bootlegged smokes from rolling in if the state raises cigarette taxes to $2.53 per pack.

Smuggling undermines the good intentions of tax hike backers. One popular study by economist Mark Stehr from 2005 estimates that as much as 85 percent of the decline in legal sales after new taxes are introduced happens because smokers are simply avoiding or evading those taxes. In other words, they're not quitting smoking.

In the face of higher prices, people have turned to rolling their own smokes using pipe tobacco. They may omit filters to get more bang for their tobacco buck, ingesting more dangerous substances in the process. This has a parallel with the era of alcohol prohibition, when it was more profitable to sell and consume hard liquor than, say, beer.

In the forthcoming book “For Your Own Good” from the Mercatus Center at George Mason University, I author a chapter describing the many parallels between alcohol prohibition and price prohibition today with cigarettes. Cigarettes remain legal products, but because of the artificial, tax-induced price, they are prone to some unsavory characteristics of the prohibition era.

These include violence against people, police and property, brazen thefts and hijackings, public corruption, bathtub gin (today's counterfeit smokes) and the “loosies” of their day, the single whiskey shot.

Policy changes don't occur in a vacuum. Raising the state excise tax 145 percent will encourage lawlessness and hurt the very people policymakers are trying to help.

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