Cheyenne politicians have a problem getting enough revenue. They’re as addicted to it as some people are to tobacco. And in order to shore up state coffers with the first, it seems that legislators are willing to hike taxes on the second.
However, excise taxes on tobacco lead to a host of illicit (and often dangerous) activities that undermine two of their advocates’ key goals: bringing in more money for the state and making residents healthier.
Why? Cross-state smuggling. It’s more common than you think.
Wyoming’s revenue committee will take up a proposed $1 excise tax hike on cigarettes in December. Adopting the increase would raise cigarette taxes to $1.60 per pack and make smokes more expensive than they are in four of six surrounding states.
Since 2008 I have co-authored studies detailing the degree to which cigarettes are smuggled between U.S. states, imported from Mexico and exported to Canada. In our most recent work—using data through 2015—my colleagues and I estimated that the Cowboy State was a source of smuggled smokes to other states.
For every 100 cigarettes consumed in Wyoming, an additional 17 were smuggled out to other states. The direction of smuggled smokes will reverse itself, however, if Wyoming adopts a 166.7 percent increase in its excise tax.
Consider the following “what if” scenario on the proposed tax increase, which uses a statistical model created by Michigan’s Mackinac Center for Public Policy:
All other things being equal, the $1 increase in the excise tax will turn Wyoming into a net importer of contraband cigarettes. 25 percent of all the smokes consumed within the state would be of the smuggled variety.
And, because smuggled cigarettes cannot be taxed, net revenues to the state would be far less than the $26 million that Wyoming’s revenue estimators are expecting from the tax increase. Our model projects that revenue will still rise, but only by $14.3 million.
It is not hard to see why. It’s simply too easy to buy cigarettes where they are cheap and make a quick profit where they are more expensive. Take North Dakota, just a stone’s throw away from the northeastern corner of the state.
At just 44 cents per pack in North Dakota, the tax differential between the two states would stand at a gaping $1.16 per pack. In addition, North Dakota doesn’t mandate a tax stamp to provide evidence of the product’s origin. This makes affixing a counterfeit Wyoming stamp much easier, should some organized crime cell choose to do so.
Wyoming pols might be tempted to dismiss this estimate. They should not do so.
Last year we summarized the findings of more than 20 other studies from university and think tank scholars and consultants. Most showed cigarette smuggling to be a major issue. One study found that between 8.5 and 21 percent of cigarettes smoked nationwide were linked to “tax avoidance and evasion.” Many individual states had higher rates.
Moreover, smuggling is not the only ill effect we see when some states increase their tobacco tax rate far above that of their neighbors. States with high cigarette taxes have been plagued by theft, violence against property and people (including murder-for-hire), corruption of public officials and other problems.
Indeed, as prices escalate due to taxes, jurisdictions suffer from “prohibition by price.” The product remains legal, but becomes expensive enough to bring about some of the infamous consequences of alcohol prohibition.
Cheyenne pols no doubt mean well, but going to the cigarette tax well to extract more revenue may be more costly than they realize.