Cigarette Smuggling Still Rampant Despite Slight Decline

Cigarette Smuggling Still Rampant Despite Slight Decline
February 17, 2014

As state and local units of government continue to hike cigarette excise taxes to raise revenues, smugglers apparently continue to profit from their illicit trafficking.

Nationwide, our research—and other academic papers—suggest cigarette smuggling is not abating dramatically. There is both empirical and recent anecdotal evidence to suggest the problem is increasing in some areas along with big excise tax hikes.

We have just published our fourth set of smuggling estimates for 47 of the 48 contiguous states, expanding our research to include data through 2012. Previous editions were released last year and in 2008 and 2010.

The 2008 and 2010 reports included detailed explanations of the statistical modeling effort we use. In short, the model matches up legal paid sales vs. predicted smoking rates. The difference between the two is our total smuggling rate, which we then compare to variables based on cigarette tax rates. Our model has been peer-reviewed by doctorate-level economists, and its output is similar to those of other scholarly efforts.

The average estimated magnitude of the smuggling rate for 2012 declined 2.03 percentage points below our 2011 estimates, or by 8.2 percent. Although that is good news, there are still significant smuggling flows, with the average smuggling rate of the top 10 in-bound smuggling states totaling 39.1 percent of consumption. The average smuggling rate for the top 10 out-bound smuggling states totals 12.8 percent of consumption. So although the estimates as a percentage of consumption are down, they are still at significant levels.

New York Tops in Smuggled Smokes

The top five in-bound smuggling states were New York (56.9 percent), Arizona (51.5 percent), New Mexico (48.1 percent), Washington state (47.8 percent), and Wisconsin (35.0 percent). This is a first appearance for Wisconsin among the top five smuggling states. It was ranked as low as 18th in the nation in 2006.

The top five out-bound smuggling states are New Hampshire (25.0 percent), Wyoming (22.3 percent), Idaho (21.3 percent), Virginia (21.1 percent), and Delaware (20.9 percent). Idaho is the only new addition to the list of top five exporters, displacing West Virginia. For every 100 cigarettes consumed in New Hampshire, 25 more were smuggled to neighboring states such as Massachusetts.

Massachusetts is currently wrestling with how to thwart a large smuggling problem and has formed an “Illegal Tobacco Commission.” Its findings and recommendations are expected to include a call for greater law enforcement effort.

Much Smuggling in Boston, Chicago

A 2013 study published in the journal Tobacco Control and titled “Cigarette Trafficking in Five Northeastern U.S. Cities” found almost 40 percent of discarded cigarette packages in Boston had tax stamps from other jurisdictions. That means they were brought in from elsewhere. A tax stamp is used as evidence cigarette excise taxes have been paid in a particular jurisdiction.

This is only the most recent study using analysis of discarded cigarette packs which scholars have produced for peer-reviewed journals. A 2012 report also published in Tobacco Control examined illicit cigarettes in “socioeconomically deprived” neighborhoods (South Bronx, New York) and reported 57.9 percent of the cigarette packs collected were untaxed. Other studies using this technique have been in done in Chicago and Ontario, Canada, and have also reported significant smuggling.

Cross-border smuggling activities can be broken into two major categories: casual and commercial. Casual smuggling occurs when individuals cross a border and buy cigarettes for personal consumption. Commercial smuggling involves larger, long-haul shipments done in an organized fashion.

We estimate that for 2012, 27.6 percent of all cigarettes consumed in Michigan were smuggled into the state.

Michigan Near Top of List

Michigan’s smuggling rate for 2012 was down slightly from the previous year, though it still ranked 10th highest in the nation. Michigan’s smuggling is split almost evenly between commercial and casual categories and also includes an export component. According to our study, for every 100 cigarettes consumed in Michigan another 3.3 percent were smuggled into Canada.

Smuggling is not the only activity that increases as excise taxes go up. We have chronicled instances of a terror group being funded by Michigan-related trafficking, adulterated and dangerous products, brazen thefts from wholesalers and retailers, and violence toward police and other people.

Unless tobacco excise tax rates start coming down, we will likely see many more stories like these.

Michael D. LaFaive (LaFaive@Mackinac.org) is director of the Morey Fiscal Policy Institute at the Mackinac Center for Public Policy in Midland, Mich. Todd Nesbit (Nesbit.19@osu.edu) is senior lecturer in economics at Ohio State University and a member of the Mackinac Center’s Board of Scholars.

Internet Info

State Cigarette Smuggling as a Percentage of Total State Cigarette Consumption chart: http://www.mackinac.org/media/images/2014/2014_LaFaive_Smuggling_Chart.jpg