Tobacco.org

Cigarette Taxes and Smuggling: Executive Summary 

States usually cite two major reasons for hiking their cigarette taxes: to decrease smoking, and to increase state tax revenue. Although these two goals can conflict, the "inelastic" nature of the cigarette market often allows policymakers to achieve both aims at once, with modest smoking reductions accompanying net increases in tax revenue.

This outcome may become increasingly difficult to achieve, however. Many states have raised their cigarette taxes significantly in recent years. These increases have likely furthered the growth of two types of cigarette smuggling: "casual" smuggling, in which individual consumers save money by buying their cigarettes in low-tax states or countries, and "commercial" smuggling, in which larger-scale operators buy cigarettes in bulk in a low-tax area and sell them tax-free in high-tax areas. This smuggling undermines both the revenue and health goals of higher cigarette taxes, while producing unintended consequences for individual states and American society as a whole. In this study, the authors consider cigarette smuggling from two angles. First, they employ a statistical model to estimate the degree to which cigarette smuggling occurs in 47 of the 48 contiguous U.S. states. Second, they review the historical experiences of three states - Michigan, New Jersey and California - known to have problems with cigarette smuggling. . . .

The authors' review of Michigan's, New Jersey's and California's cigarette smuggling experiences suggest that cigarette smugglers can realize large profits: tens of thousands of dollars for a single vanload of cigarettes, and hundreds of thousands of dollars for a single truckload. These sums represent a loss in estimated tax revenues to a state's treasury, but they have produced other unintended consequences, including a variety of crimes:

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