Reason.com

Free Minds & Free Markets

Cigarette Smuggling Keeps Illinois Residents in Affordable Smokes

High tobacco taxes neither raise revenue nor discourage smoking.

Richard B. Levine/NewscomRichard B. Levine/NewscomLooking 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.

Photo Credit: Richard B. Levine/Newscom

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Conchfritters||

    He pulls a knife, you pull a gun, he sends one of yours to the hospital, you send one of his to Missouri to buy some more smokes. That's the Chicago way.

  • loveconstitution1789||

    Wanna buy a loosie?

  • Flaco||

    The penultimate words of Eric Garner.

  • cravinbob||

    Actually it was in fact "I can't breathe I can't breathe I can't breathe I can't breathe" No humor at all. What will yours be?

  • Jerryskids||

    Illinois should just build a wall and make Missouri pay for it.

  • NoVaNick||

    Back when Bloomberg was NYC mayor, he complained about how Virginia's low cigarette taxes (still only 30 cents per pack) was encouraging smuggling to his city. I think he threatened some kind of legal action but got told to fuck off, as he did when he complained about Virginia's lax gun laws.

  • Bubba Jones||

    Sounds like the opening scene of Beverly Hills cop.

  • Enjoy Every Sandwich||

    The Illinois state government will just prog harder. That's their way.

  • C. S. P. Schofield||

    And tell Illinois residents to sqeal like pigs!

  • Fist of Etiquette||

    Another article whose author I could tell from the headline.

    Other states need to put tariffs on Missourah goods to make up for this trade deficit.

  • Conchfritters||

    Missourah's goods? Like Stetson hats?

  • CDRSchafer||

    Start taxing stupidity, bribes, corruption and kickbacks in Chicago and watch the revenue roll in.

  • Rhywun||

    I remember long ago Ontario imposed a new tax that jacked up the price of a pack of smokes to over 5 dollars (the price in New York at the time was less than 3 bucks), saw the smuggling it caused, and revoked the tax.

    It was a simpler time, to be sure.

  • vek||

    I know a guy who does this for a living. He actually knows the exact amount that you are legally allowed to have on you at any given time, it's 100 something cartons IIRC. By staying within the letter of the law he is basically impossible to bust. They would have to catch him red handed selling cartons to somebody for more than he paid, because technically he could buy cartons for a friend and get reimbursed legally. By doing the more frequent and smaller trips he's basically golden, but still making north of a grand per run.

    He's cut back on how much he does it now, but several years ago when he was more active he was netting more than $10K a month, and literally only selling to people that were friends, AKA wouldn't rat him out. And the price gap between our state and the one he goes to is nowhere near what it is in other parts of the country. One can only imagine how much cash even a half assed casual smuggler could make in some of these other areas.

  • ||

    Missouri's gasoline and alcohol are also cheaper than in Illinois due to taxes. I don't smoke but I do drink and drive (not at the same time) so I fill up the car and load up with beer and wine usually about once a week when I visit Missouri.

    Two of my three children have moved to Missouri due to job opportunities and lower taxes.

  • majil||

    Just don't try this in NY as you will get chocked down by the Super Human Super Coppers on the Cigarette Tax Task Force !
    The Coppers claim they are afraid for their life in being that close to Tobacco will give them cancer and therefore the courts give them the green light to wack you

  • NoVaNick||

    Well, the "end game" is to completely outlaw the sale of tobacco and probably e-cigarettes too by 2030 according to the WHO. So the progs will have to find someone else's pocket to pick so they can pay for poor kids' health insurance and various other pet projects, including locking up those remaining defiant smokers who might try to grow their own tobacco.

  • NoVaNick||

    DC was considering hiking their cig taxes even higher than NYC's, even though they are just a short hop across the Potomac from one of the lowest cig taxes in the nation. Yep-they really are that stupid.

  • Curly4||

    Well the way to create more crime is to make legal products to high to buy by adding taxes on them.

  • SandyB||

    As far as people who still want to smoke even though they know that it will most likely contribute to their early death. Probably not worth a herculean effort to save them from themselves. Taxes on cigarettes prevent younger people from affording it. That's where the focus of the war on cigarettes should be. The problem with adult smoking will solve itself over the next few decades. And I have watched loved ones die from COPD and lung cancer. It's not going to be a fun ending. Hopefully, if their loved ones smoke, then watching that horrible death might make them rethink their need for smoking.

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online