Editor’s Note: This article first appeared in The Hill on May 15, 2021.
In the past few weeks, federal officials have announced a policy that is very likely to increase cigarette smuggling into the United States and have other unintended consequences.
The 2021 Tobacco Tax Act, introduced in Congress on April 22, would both increase federal excise taxes (FET) on every pack of cigarettes and adjust the tax to inflation each year to ensure automatic tax increases. In addition, the Food and Drug Administration has decided to ban menthol-flavored cigarettes, a popular type of smoke. Both proposals on their own would be problematic, but together they could lead to prohibition-style lawlessness with little public health benefit.
The federal excise tax hike is likely to increase the number of cigarettes smuggled into the United States. The Tobacco Tax Act, if passed, would double the FET rate from $ 1.01 per pack to $ 2.02. This would widen the price difference between low-tax countries and the US and make smuggling across our borders more attractive.
National borders are of little concern if there are massive profits to be made from smuggling products such as cigarettes. A 2016 study by the International Monetary Fund, “How to Design and Enforce Tobacco Excises”, reports a consistent estimate from five expert studies that the global illegal cigarette market accounts for 10 percent of global cigarette consumption.
This is a global average, however, and in some countries illegal markets account for more than 40 percent of total consumption. In the United States, three studies published in 2013, 2015, and 2019 have set the national tax evasion and avoidance rate for cigarettes at up to 21 percent of the market. This is a number that is almost certain to jump with an increase in the FET. The introduction of a mechanism to increase the tax based on the inflation rate almost always makes smuggling more attractive.
I am the co-author of a number of cigarette tax and smuggling studies that seek to measure cigarette smuggling rates in most of the 48 bordering states. By 2018, we estimate that New York was America’s number one smuggling state with 53 percent of total consumption, and California number two with 48 percent. Both states, and likely others as well, are likely to see an enormous influx of internationally smuggled smoke through their seaports.
As part of my research, I have reported on international smuggling cases that have highlighted how profitable illegal international human trafficking can be. An illegal shipment in 2012 came from China to New Jersey and was eventually delivered to California via roads and highways.
The federal government is aware of the problem. In 2015, the State Department published “The Global Illicit Trade in Tobacco: A Threat to National Security,” a paper that outlined the effects of cross-border cigarette smuggling. It stated: “Criminal networks are not only expanding by trading in illegal tobacco products, they are also diversifying their activities.”
These activities will only become more profitable if excise taxes are increased, especially if the Food and Drug Administration enforces its April proposal to ban menthol-flavored cigarettes. Menthol-flavored smokes make up a large percentage of the legal market. Banning them outright would only add to the portfolio of products smuggled into the United States by transnational organized crime cells. Such bans have been attempted in Canada and Massachusetts, and the first evidence of their success is not positive.
A number of Canadian provinces banned the sale of menthol cigarettes before a national ban was passed in 2018. In a 2020 working paper entitled “Intended and Unintended Effects of the Menthol Cigarette Ban”, university scholars found that the menthol ban “significantly increased the smoking of non-menthol cigarettes among adolescents, resulting in no overall net change the youth smoking quota ”. The Canadian and US researchers also found that the menthol cigarette ban shifted retail smokers’ purchases to First Nations reserves. Massachusetts banned menthol from June 2020, and initial data from there suggests that some purchases in Bay State were simply being relocated to other states, particularly New Hampshire.
Federal officials may care about the best intentions of US citizens as they work to raise taxes or ban certain products altogether. However, both will have unintended consequences that can undo much of the good they hope to achieve.
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