Since 2008, Mackinac Center for Public Policy analysts have periodically published estimates of cigarette smuggling in 47 of the 48 contiguous states. The numbers are quite shocking.

In 2012, more than 27 percent of all Michigan in-state consumption was smuggled. In New York, almost 57 percent of all cigarettes consumed in the state were also illicit. This has profound effects on the revenue generated by state (and sometimes local) government.

Clicking on the graphic at right brings up a chart of estimates we made for 2012. In the "smuggling rate" column a positive percentage indicates a net export state. For example, the first entry — Alabama — indicates that for every 100 packs of cigarettes consumed in the state an additional 7.7 packs are smuggled out. By contrast, the Arkansas rate of –8.05 percent tells us that just over 8 percent of all cigarettes consumed in the Razorback state are smuggled in.

The last column indicates the revenue lost or gained to state treasuries associated with smuggling. Alabama gains $9.8 million from cigarette sales smuggled to other states while Arkansas loses $17.8 million from illicit acquisition of cigarettes.

That revenue loss is tiny compared to Michigan, which lost an estimated $350 million to smuggling in 2012. The revenue figure may drop going forward as the state adopts digital tax stamping of cigarette packs to improve its tax enforcement regime. Two different columns in the graphic rank states by their smuggling rate and total packs smuggled. Michigan is 10th and 5th, respectively.

We estimate nationwide revenue losses due to cigarette smuggling at $5.5 billion, a statistic consistent with the Bureau of Alcohol, Tobacco, Firearms and Explosives' $5 billion estimate for 2009. Some cities, like New York, also impose their own cigarette excise taxes. Their revenue losses are not part of our totals.

The losses to individual states in casual smuggling — individual smuggling for personal use — are netted out with the gains to other states experiencing the increased sales. However, this does not account for North Carolina, which is the major source state for commercial smuggling — large scale, organized, long-distance smuggling — in our statistical model.

(Note: The model and accompanying explanation can be found in our 2008 study, "Cigarette Taxes and Smuggling: A Statistical Analysis and Historical Review").

It’s a truism that a current legislature cannot bind future legislatures to follow through on its own policy and spending preferences. For example, this year’s House and Senate may vote to raise taxes and provide a chicken in every pot, but nothing prevents politicians elected in future years from cutting taxes and decreeing, “No more chicken soup for you!”

From the start, this “binding future legislatures” challenge has been implicit in Gov. Rick Snyder’s proposal for the state to provide a $350 million partial bailout for Detroit over 20 years. The current Legislature could appropriate one or two annual installments of $17.5 million, but the new Legislature elected next November, or a subsequent one, could just as easily declare “the heck with that” and appropriate nothing at all.

There is one way to get around this, but it involves making an already unpopular bailout proposal even more politically toxic to voters outside the city: Debt and borrowing. The state could simply borrow $350 million and give it to the city right now, pledging to repay lenders from a specified revenue stream.

What has been implicit recently became explicit in recent news reports. According to the April 17 edition of MIRS News, Gov. Rick Snyder said:

“One of the options we could look at is essentially looking at tobacco settlement dollars to securitize a bond issue. But there are other ways to look at. So again, that's going to be part of the open discussion we'll have is the best ways to finance something like this.”

“Securitize” is political bond broker-speak for “borrow.” When politicians specify “tobacco settlement dollars” as the funding source for some pet project, it is usually intended to make it appear as magic money painlessly flowing out the door, but that is not the case: Every dollar delivered to Detroit from this revenue stream is a dollar made unavailable for other vital state needs, like filling potholes for example.