Study: High Cigarette Taxes Cause Widespread Smuggling in Michigan, Elsewhere in U.S.

Michigan’s inbound cigarette smuggling rate was 10th highest in the nation in 2009, according to a Mackinac Center study released today. The report is an update of the Center’s 2008 cigarette tax and smuggling study, which likewise provided estimated smuggling rates for 47 of the 48 contiguous states. Michigan’s smuggling rate, which was measured as a percentage of in-state cigarette consumption, represents a slight improvement over its 9th place ranking in the previous analysis, which used data from 2006. Michigan is also in the top five states in its rate of casual cross-border smuggling by its residents.

“Lansing’s incoming legislators should be careful about looking to cigarette taxes to solve any state budget deficits,” said Michael D. LaFaive, Mackinac Center director of fiscal policy and the study’s co-author. “Few people realize the vast array of unintended consequences, such as theft and violence, inflicted on job providers, consumers, police and other innocent victims. Policymakers may benefit from watching an eye-opening video by my colleague Kathy Hoekstra that focuses on the smuggling-related challenges faced by a cigarette wholesaler in the city of Detroit”

The authors calculated that in 2009, more than half (51.8 percent) of the cigarettes consumed in Arizona had been smuggled into the state, making it the leader in cigarette trafficking. The authors believe Arizona’s new position is a direct function of its 82-cent per-pack cigarette tax hike in December 2006, a 2009 federal cigarette tax hike and Arizona’s proximity to Mexico. Rounding out the top five smuggling states are New York (47.5 percent), Rhode Island (40.5 percent), New Mexico (37.2 percent) and California (36.3 percent).

“It should come as no surprise that states with increasing excise taxes also saw significant increases in total smuggling rates,” said co-author Todd Nesbit, College of Charleston assistant professor of economics and Mackinac Center adjunct scholar. “Taxpayers are not sheep lining up for a shearing — if they have to cross a border to save money, they will.”

The authors examined both “commercial” and “casual” smuggling. Commercial smuggling involves large-scale and typically long-distance operations, while casual smuggling typically involves individual cross-border purchases for personal use. In the latter category, Michigan finished 5th among the 47 states in the study at 11.6 percent of total state consumption, bested only by New York (19.9 percent), Rhode Island (18.2 percent), Washington (14.5 percent) and Montana (13.2 percent).

Commercial smuggling also plays a significant and often dominant role in smuggling. The top five states for commercial, in-bound traffic are New Jersey (29.1 percent), New York (28.5 percent), Vermont (24.2 percent), Massachusetts (23.3 percent) and Connecticut (20.9 percent).

Michigan’s commercial smuggling rate is 16.6 percent. The new study details how just one recent commercial smuggling case in Michigan allegedly involved the illicit purchase of more than 40 million cigarettes between October 2008 and July 2009.

These illicit transactions represent lost revenue to the Treasury and can produce a raft of unintended consequences including theft, hijacking, violence against residents and distribution of dangerous, often adulterated counterfeit cigarettes.

The authors also attempted to forecast the impact of proposed cigarette tax hikes in Ohio, Illinois, California and Michigan. They found that a $1.25 per-pack tax increase in Ohio would increase the state smuggling rate to 23.3 percent from 9.2 percent of in-state cigarette consumption. In Illinois, a $1.00 tax increase would cause cigarette smuggling to go from 5.9 percent to 26.3 percent. California would see its smuggling rate increase from 36.3 percent to 51.9 percent with the adoption of an additional $1.00-per-pack tax hike. In Michigan, the last proposed increase — which was not adopted — was for 25 cents. A similar hike today would increase smuggling in the state from 26 percent to 28.3 percent of the state’s total consumption.

The 40-page study can be found at https://www.mackinac.org/archives/2010/2010-09TobaccoSmugglingFINALweb.pdf. The video produced by Communications Specialist Kathy Hoekstra is posted at https://www.mackinac.org/14208#3478.