Looking for a business opportunity that will turn a quick profit? Here's an idea: Load up a truck full of cigarettes in Missouri, drive them to neighboring Illinois, and watch the cash roll in from Prairie State smokers happy to find a respite from ruinous tobacco taxes.
Well, yes, that's illegal. But that just means you and your competitors will have to be fast on your feet. And you will have competitors; this sort of opportunity is a magnet for entrepreneurs.
"Missouri is known as a mecca for cigarette smugglers because it has the lowest tax in the country at just 17 cents," reports KPLR in St. Louis. "Every surrounding state is over a dollar. Criminals see a pipeline of profit leading to Chicago, where the combined city and state cigarette tax is $6.16 per pack."
Missouri voters are no fools, either. They've repeatedly defeated attempts to hike cigarette taxes in their state. That keeps their money in their own pockets, and not in the hands of politicians. It also means continued business opportunities for smugglers to transport cigarettes to higher-tax states.
By contrast, Illinois doubled its cigarette taxes in 2012, from $0.98 per pack to $1.98. There's a lot of room for arbitrage in the space between the taxes on a pack of smokes in Missouri and the government's take in Illinois—and that's before we even get to the special taxes imposed by Chicago.
But maybe Illinois is at least raking in lots of cash to pay off its wild budget deficit, which amounted to $14.6 billion last year in the 16th straight year of deficits. And then there's the $137 billion funding shortfall for the state's public employee pensions "with no fix in sight" as the Chicago Tribune puts it. The state's bond rating was downgraded to one step above junk as a result.
Surely, extra tax money might help hold back the tidal wave of red ink. If it was spent right, that is. And if that money materialized—which it hasn't.
Cigarette tax revenue in Illinois actually decreased 8 percent from 2016 to 2017 (it fell the previous year, too). Sure, Missouri's cigarette tax revenue also fell, though only by 3 percent. But Missouri officials never made any grandiose projections for their steady-state tax rate, while Illinois politicians insisted the tax hike they pushed through would generate an extra $350 million.
Instead, many Illinois residents are crossing the border to buy their smokes, or they're buying relatively cheap cigarettes that have been smuggled across the state line. And Illinois state government finances remain…shaky. In fact, the Illinois Policy Institute, a market-oriented think tank, says the state is in worse shape than it admits and hides its condition through creative accounting practices.
OK. So high cigarette taxes aren't generating revenue and instead are fueling a huge cross-border smuggling industry. But sin tax advocates often claim that the levies they favor will simultaneously generate gobs of cash while discouraging activities of which they disapprove—and social engineers really don't like tobacco use. It's the sort of argument that will break your brain if you think on it too long, so let's just go with it. Maybe they've succeeded in discouraging smoking even if their revenue projections were a little optimistic.
Except that the data doesn't really support that conclusion.
"According to the most recent data available from the Illinois Department of Public Health, the percentage of Illinois adults who smoked in 2012 was 18.6 percent, a number that decreased to 15.1 percent by 2015," notes the Illinois Policy Institute. "But the national smoking rate decreased to 15 percent from 18 percent in the same period, meaning Illinois' smoking rate decreased just half a percentage point more than the national average. At best, the tax hike could be said to have a marginal impact on influencing smokers to quit."
And that's not a surprise—it's entirely keeping with the research into the deterrence effect of cigarette taxes.
"Our evidence suggests that increases in cigarette taxes are associated with small decreases in cigarette consumption and that it will take sizable tax increases, on the order of 100% to decrease adult smoking by as much as 5%," wrote Kevin Callison and Robert Kaestner of the University of Illinois in a 2012 paper. "The paucity of evidence regarding the association between tobacco taxes and adult cigarette consumption is inconsistent with the widespread support for taxes as a way to reduce smoking," they concluded.
Why aren't tax hikes changing behavior as predicted?
While smoking rates have declined over the years, they write, anti-smoking efforts have resulted in a situation in which "the pool of smokers is becoming increasingly concentrated with those with strong preferences for smoking." These smokers aren't easily deterred by tax hikes or anything else. Notably, "as cigarette taxes and prices continue to rise, smokers are taking other steps to thwart the impact of the price increase such as switching brands and increasing purchases on the black market."
In New York, which has the highest cigarette taxes in the country, more than half of all cigarettes sold are smuggled from elsewhere, according to the Tax Foundation and the Mackinac Center for Public Policy. In addition, "a study in Tobacco Control examined littered packs of cigarettes in five northeast cities, finding that 58.7 percent of packs did not have proper local stamps."
Basically, politicians have engaged in a Darwinian experiment with tobacco policy that has guaranteed that the remaining ranks of smokers are hard-core tobacco fans. These fans are resistant to official efforts to empty their pockets and modify their behavior. They're perfectly happy to buy smuggled smokes, and to deny revenue to the tax man.
Which is why loading a truck with cigarettes in Missouri—or any low-tax jurisdiction—and smuggling them to high-tax destinations like Illinois is unlikely to disappear as a profitable business opportunity any time soon.