Will there be cigarette tax will increase this 12 months?

This month and the last have resulted in arrests and sentences for smuggling cigarettes and other contraband in correctional facilities in Kansas and Maryland, respectively. Legislators considering increasing cigarette taxes should note that higher taxes encourage illegal smuggling into a state, and if law enforcement cannot keep illegal smokers out of prisons, there is little hope of the contraband out of the public’s hands hold.

This is important as several state legislatures, including Maryland’s, are openly considering increasing the cigarette tax. Even if politicians do not maintain excise taxes, there are a number of interest groups who stand up for them.

But officials shouldn’t listen to them. The illegal market for cheaper smokers is taking on a taste of the prohibition era. Raising cigarette taxes has similar effects to banning alcohol – it leads to rampant smuggling and other harmful unintended consequences. We call this “price ban”.

We have estimated the levels of illegal cigarette traffic in and out of most states. In our most recent review, New York and California were ranked the best smuggling states. Maryland is fighting for third place. The general assembly there passed a tax increase of USD 1.75 per package last year, which increased the total tax to USD 3.75, which corresponds to a jump of 88 percent. This was quickly rejected by Governor Larry Hogan, but it can be revived in a veto override attempt.

We estimate that if less than 9 percent of all Maryland cigarette consumption is adopted, smuggling will increase to 47 percent. We also expect the majority of these smuggled smokers to arrive as a result of the “occasional” smuggling. The casual smuggler usually tries to save money by shopping across a border – in Virginia, for example. Virginia cigarette tax is only 60 cents per pack, so it’s not hard to see how much consumers could save by buying elsewhere. Substantial profits await organized criminals if they also successfully carry out a large-scale smuggling operation.

An excise tax discussion also took place in Indiana late last year, where the Indiana Chamber of Commerce recommended an increase of $ 2 per pack. We made this possible change through our statistical model, an activity that illustrates the power of tax increases. Our analysis shows that Hoosier State would go from being a net exporter of smuggled smoke to a net importer of smoke.

Out of 100 cigarettes consumed in Indiana in 2018, another 19 were bought there but consumed elsewhere. If the tax hike were passed, likely every third cigarette consumed in Indiana would be smuggled into the state. The beneficiaries? Michigan and Illinois cigarette dealers, the treasuries of those states, and organized crime.

The Indiana Chamber isn’t the only group calling for a cigarette tax increase. The American Heart Association last month called for a $ 1 hike in New York. The state already charges an excise tax of $ 4.35, and New York City charges an additional $ 1.50. This and its proximity to Virginia are just two reasons New York is number 1 for smuggled smokers.

We estimate that an increase in taxes of $ 1 per pack would increase the smuggling rate in New York from more than 53 percent of the total market to 64 percent and result in a net decrease in tobacco tax revenues of $ 62.7 million. Taxes are already so high that most of the people who still smoke are likely the ones who strongly prefer the habit. Instead of quitting, they are turning to contraband cigarettes instead and increasingly will as the price go up.

Our studies of cigarette smuggling are not the only ones of their kind. We have cataloged more than two dozen similar analyzes dating back to 2005, and most of them show strong links between high cigarette taxes and smuggling.

Unsurprisingly, banning certain types of cigarettes has similar consequences. Last week, the New England Convenience Store & Energy Marketers Association reported that Massachusetts – the first state to ban the sale of menthol cigarettes – lost $ 62 million in excise taxes in the first six months of its ban (compared to the Previous year)). Rhode Island and New Hampshire benefited, with menthol cigarette sales increasing 29 percent and 90 percent, respectively, in each state.

Both the total cigarette ban and her cousin’s high excise tax rates lead to an increase in smuggling. Politicians and organizations should realize this before adopting policies that would lead to even more smuggling and other unintended consequences.

Michael LaFaive is Senior Director of Financial Policy at the Mackinac Center for Public Policy, a Michigan-based research and educational institution. Todd Nesbit, Ph.D., is an assistant professor of economics at Ball State University. Both contribute to the Mercatus Center book “For Your Own Good: Taxes, Patronage and Tax Discrimination in the 21st Century”.