No, Hiking Taxes Isn't the Magic Solution to Smoking


Assef Elweter

During my appearance earlier on the Thom Hartmann show, Hartmann emphasized cigarette taxes as a means of offsetting the "externalities" in terms of lost productivity and health costs caused by tobacco consumption. "Lots of lifestyle choices cause externalities," I told him. "But if you show up to work with a hangover, your employer suffers the lost productivity, but the government gets the taxes." Measuring costs and benefits and offsetting costs with taxes might work as a classroom exercise, but it's a non-starter in a world where costs (and subjective benefits, such as pleasure) are distributed all over the place and we don't all (yet) work for the government. That's probably why most cigarette tax advocates stick with a simple social-engineering argument for discouraging tobacco use by hiking the cost through the roof with taxes. But even they can't explain how tobacco is going to be the one popular good or service ever discovered that doesn't breed a massive black market when larded with high taxes and tight regulations.

The socially molding possibilities of taxes came up again, recently, in an article in the New England Journal of Medicine that called for tripling the government's take on cigarettes around the world. The authors, Prabhat Jha, M.D., D.Phil., and Richard Peto, F.R.S., write:

Tripling inflation-adjusted specific excise taxes on tobacco would, in many low- and middle-income countries, approximately double the average price of cigarettes (and more than double prices of cheaper brands), which would reduce consumption by about a third and actually increase tobacco revenues by about a third. In countries in which the government owns most of the industry, as in China, the distinction between taxes and profit is fairly arbitrary, but doubling the average prices would still substantially reduce consumption and increase revenue.

But this isn't a hypothetical policy proposal. We already know, because it's been done, that hiking cigarette taxes breeds black markets in smuggled and counterfeited (illegally produced knock-off cigarettes sold under phony labels) smokes. New York has the highest cigarette taxes in the country, at $4.35 per pack, plus another $1.50 levied in New York City. The result is that 60.9 percent of cigarettes sold in the state are black market, according to the Mackinac Center for Public Policy. Washington state has high cigarette taxes, relative to its neighbors, and a massive smuggling problem (48.5 percent of the state's cigarettes come from the black market).

You could, I suppose, impose globally uniform taxes to discourage the easy sort of smuggling from low-cost jurisdictions to high-cost ones. But that would just create an incentive for illegally produced cigarettes, just as black markets supply cocaine, heroin, and marijuana where they're completely banned.

How do the authors address this problem? In one paragraph.

Smuggling is a concern when tobacco taxes rise; about 10% of all cigarettes manufactured worldwide are already untaxed. Use of specific excise taxes on tobacco (rather than ad valorem taxes), stronger tax administration, and practicable controls on organized smuggling can, however, limit the problem. Even with some smuggling, large tax increases can substantially reduce consumption and increase revenue (Figure 4), especially if supported by better tax enforcement.

The solutions are "stronger tax administration" and "practicable controls on organized smuggling"? Really? It's a shame nobody ever thought of that before through all the efforts to suppress black markets throughout history.

Well…Maybe black markets are just an externality that can be offset by a wee bit more tax.