Sky-High European Cigarette Taxes Drive Thriving Black Market

Smuggled smokes account for more than a third of consumption in France and Ireland.

In late March, European Union (E.U.) officials announced they had taken down a five-country cigarette-smuggling operation and seized over 40 tons of tobacco products. The ambitious network reportedly transshipped the cigarettes far and wide to obscure their sources and destinations, while also hiding them in hidden compartments built into cargo containers. Why would smugglers go through such effort to move perfectly legal products, and why would the authorities care? In Europe, as in the United States, the answer is the same: sky-high taxes.

Smuggled Smokes in Hidden Compartments

In announcing its efforts against the smuggling network operating in Italy, France, Poland, Switzerland, and the U.K., the European Public Prosecutor's Office, which worked with international law enforcement agencies as well as police in all five countries, noted the smugglers used "maritime and commercial routes designed to evade customs inspections," passed shipments "through Georgia, Kenya, the Netherlands and Turkey, in order to hide the true origin of the illicit goods," and that "false bottoms were used as hidden compartments built into containers to conceal the tobacco."

At the conclusion of the investigation, "enforcement activities were carried out at the Port of Genoa, leading to the seizure of close to 41 tonnes of manufactured cigarettes, with an estimated loss of customs duties, excise duties and VAT exceeding €10 million."

Absolutely nothing motivates government officials like the extraction of taxes from the public. And lots of tax money is at stake when it comes to cigarettes.

Taxes Make Up Most of the Price of Cigarettes

This month, the Tax Foundation, which has a branch in Brussels, reported that "cigarette smokers in the European Union pay far more in excise taxes than they do for the cigarettes themselves." Report authors Jacob Macumber-Rosin and Adam Hoffer wrote that excise taxes in the E.U., which are intended to deter smoking as much as to raise revenue, start at the equivalent of $2.11 per pack and that the "total excise duty is at least 60 percent of the national weighted average retail price." Value-added taxes are tallied after excise duties are levied.

"The highest tax in the EU is levied in Ireland at €10.71 ($12.58) per pack of 20 cigarettes, followed by France at €8.09 ($9.51) and the Netherlands at €7.77 ($9.13)," they added.

Of the countries implicated in the recently busted smuggling ring, Switzerland and the U.K. are not members of the E.U. But taxes make up almost 60 percent of the roughly 9 Swiss francs ($11.52) average price of a pack of cigarettes. According to the U.K. Office of Budget Responsibility, "the rate on cigarettes is 16.5 per cent of the retail price plus £7.07 on a packet of 20" (the British price per pack of cigarettes averages about £16, which is the equivalent of $21.71).

With taxes representing the majority of the price of cigarettes across Europe, there's ample incentive to smuggle cigarettes from low-tax jurisdictions or illicit manufacturers. Underground entrepreneurs have responded accordingly.

Growing Black Market for Tobacco

"Illicit consumption in the 38 markets grew marginally by 0.2% in 2024 to 52.2bn cigarettes; representing 10.0% of total consumption," KPMG reported last summer in a study of Europe's black market for cigarettes. "The marginal growth in illicit consumption has been due to volume growth across a wide number of markets, but especially in France and the Netherlands" partially offset by declines in Greece, the U.K., and war-torn Ukraine.

By purchasing their cigarettes from black market vendors, European smokers escaped paying (and deprived governments of) an estimated €19.4 billion in taxes, or $22.88 billion. Given the stakes, of course smugglers are building secret compartments into cargo containers.

"Higher tax rates incentivize smuggling," the authors of the recent Tax Foundation report on EU cigarette taxes commented in an earlier look at European tobacco smuggling. "As tax rates increase, consumers and suppliers search for ways around these costs. In cigarette markets, consumers tend to shop across borders where the tax rates are lower, and illicit market entrepreneurs develop black and gray markets to sell illegally to consumers, paying little or no tax at all."

The extent to which consumers embrace black markets can be expected to depend on a variety of factors. These include the rapaciousness of taxes, of course, but also cultural attitudes towards government extractions and acceptance of measures for thwarting the authorities. In Europe, this has resulted in the largest black market for cigarettes developing in France.

KPMG noted that "France continues to remain the largest market for illicit cigarettes across the 38 markets in the study and saw the largest increase in illicit consumption in 2024 at 2.0bn cigarettes, driven by a 1.5bn cigarette increase in Counterfeit, and a 1bn increase in Illicit Whites [cigarettes legally manufactured in one country and smuggled into higher-tax jurisdictions], partly offset by a 0.5bn decrease in Other [counterfeit and contraband cigarettes]."

The Tax Foundation, it should be noted, puts the black market's share of France's cigarette consumption at 38.5 percent, just slightly exceeding the 37 percent share in Ireland.

Cigarette Black Markets Are Even Larger in the U.S.

But there's plenty of room for growth in Europe's illicit tobacco economy and loads of incentive with such high taxes. In the United States, smuggled cigarettes make up more than half of the market in both California and New York. That's despite the fact that, at $2.87 per pack in California and $5.35 per pack in New York (plus another $1.50 in New York City), cigarette taxes in those states are less burdensome than in Europe—though obviously still unacceptably high for consumers. So long as there are lower-tax jurisdictions or underground factories from which to source cigarettes, demand for cheaper smokes will drive supply.

Politicians who simultaneously see high taxes as a means of extracting revenue from the public and as a means for discouraging people from engaging in disapproved behaviors, like tobacco consumption, inevitably trip themselves up. People have limited patience for being mugged and manipulated by the powers that be. When they've had enough of being pushed around, they'll break the law to gain themselves more freedom. That's the way it has always been and will always be.

European Union officials may boast of busting one cigarette smuggling network, but fed-up members of the public will make sure there are more to take its place.