Policy

President Obama's New Cigarette Tax Will Fuel an Already Booming Black Market in Smokes

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Large image on homepages | Assef Elweter
(Assef Elweter)
Cigarette
Assef Elweter

Drawing on the old adage, "if you want more of something, subsidize it; if you want less, tax it," politicans around the country have turned to burdensome tariffs on stuff they don't like as a proxy for the hard work of passing formal prohibitions. Booze, tobacco and ammunition have been popular targets of late, But maybe politicans need an annotated version of that adage. As the cigarette market demonstrates, when you wield revenue collection as a tool of social engineering, what you get is less of the legal version of the product that you're trying to tax the hell out of. As outright prohibitionists discovered (but ignored) long ago, savvy black marketeers always stand ready to dodge the law to give people what they want. And among the things people want are smokes at an affordable price. That's an important point to remember just days after the president called for a 94 cent hike in federal cigarette taxes.

Michigan's Mackinac Center for Public Policy surveys the cigarette market every two years to see just how it responds to taxes intended to enforce what it calls "prohibition by price." Then the center's analysts break down, by state, the estimated percentage of the cigarette market served by smugglers who bring in goods from lower-taxed jurisdictions, or even import counterfeit cigarettes from out of the country to the booming market. With the highest cigarette tax in the country, overtly passed to discourage smoking, New York has managed to drive the majority of the cigarette market to smugglers. As the center's Michael D. LaFaive and Todd Nesbit, Ph.D. put it:

We find that New York currently holds the top position as the highest net importer of smuggled cigarettes in 2011, with smuggled cigarettes totaling a staggering 60.9 percent of the total market. Not coincidentally, New York also has the nation's highest state cigarette tax at $4.35 per pack, plus another $1.50 levied in New York City.

The top ten states in terms of smuggled cigarettes as a percentage of the market for smokes  are:

  1. New York: 60.9
  2. Arizona 54.4
  3. New Mexico: 53
  4. Washington: 48.5
  5. Rhode Island: 39.8
  6. Wisconsin: 36.4
  7. California: 36.1
  8. Texas: 33.8
  9. Utah: 32.0
  10. Michigan: 29.3

Cigarette smuggling is lucrative. Mike Campbell, a spokesman for ATF, told CNN, "We've had people trading our undercover agents kilos of cocaine for cigarettes."

As heart-warming as it is to see people defying government nannies to indulge in the vices of their choice, there is a very real price to be paid when governments try to prohibit things overtly or by tax, and thereby create a black market. LaFaive and Nesbit point out that "[t]he destructive consequences of rampant tobacco smuggling include the corruption of government officials, violence, theft, counterfeiting and dangerous, adulterated products."

Which is to say, the black market in smuggled cigarettes resembles every other black market that prohibitionists have managed to conjure into existence. Prohibitions just don't work. Well, unless you're a black marketeer, that is.