Raising tobacco taxes is often seen as a way for states to boost revenue, but research shows the primary effect is to promote cigarette smuggling, some of which helps fund terrorist groups.
“The higher that revenue-hungry politicians raise tobacco taxes, the more profit smugglers can make,” claims Patrick Gleason, director of state affairs for Americans for Tax Reform, in an op-ed for The Wall Street Journal Sunday.
An unintended consequence of such tax hikes, Gleason says, is therefore to encourage cigarette smuggling, which also “[directs] some money toward nefarious causes” such as terrorism.
In recent years, both the Washington Post and former New York City police commissioner Ray Kelly have said there is evidence that smugglers are funneling millions of dollars from illegal cigarette sales to known terrorist groups, including al-Qaida.
Gleason notes recent cigarette tax hikes New York, New Jersey and Washington, D.C., among other places, have produced far less revenue than anticipated, and in some cases even correlated with an overall decrease in the amount collected.
In fact, he says, “Of the 32 state tobacco tax increases that went into effect between 2009 and 2013, only three met or exceeded revenue projections, according to industry data.” (RELATED: Cigarette Tax Increases Not Producing Desired Revenues)
In part, this may result from smokers reacting to the higher prices by reducing consumption, but Gleason suggests that a more significant factor is simply that “high tobacco taxes inevitably induce some low-income smokers to turn to black markets, where they can buy cigarettes at a fraction of the price.”
A recent study conducted by the Tax Foundation, an independent tax policy research center, supports this view, finding that “smuggling rates generally rise in states after they adopt large cigarette tax increases.” (RELATED: Illinois Boost Cigarette Tax, Police Promise to Hammer Evaders)
Of the 17 states with a net outflow of smuggled cigarettes in 2013, just two imposed taxes of more than $1 per pack, and both of those states—Pennsylvania and New Hampshire—are located near neighbors with relatively high cigarette taxes.
In contrast, of the 15 states in which smuggled cigarettes accounted for 20 percent or more of total consumption, just two impose taxes of less than $1.50 per pack, while eight tax cigarettes at $2 or more per pack. (RELATED: State-Funded Study: Cigarette Tax Hurts New York’s Poor Most)
“Public policies often have unintended consequences that outweigh their benefits,” the Foundation explains. “One consequence of high state cigarette tax rates has been increased smuggling as criminals procure discounted packs from low-tax states to sell in high-tax states.”
In New York, for instance, cigarette taxes have increased 190 percent since 2006, while smuggling has risen 62 percent. New York leads the nation in both categories, with a tax rate of $4.35 per pack and untaxed cigarettes making up an estimated 58 percent of the overall market.
The issue of cigarette smuggling in New York rose to prominence recently with the case of Eric Garner, who died after being placed in a chokehold by police officers who accused him of selling “loosies,” or single cigarettes, from packs without tax stamps.
Various policy responses have been suggested to address the issue of cigarette smuggling, ranging from “differential tax rates near low-tax jurisdictions” to “cracking down on tribal reservations that sell tax-free cigarettes,” but the underlying problem remains, according to the Tax Foundation, because “high cigarette taxes amount to a ‘price prohibition’ of the product in many U.S. states.”
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