A proposal to hike cigarette excise taxes by $2 per pack would result in a more than doubling of the state’s cigarette smuggling rate, according to new research. Scholars have long noted that the health-related goals of policymakers are often undermined by the very tax they wish to impose to improve public health. In this case it would be undermined by smugglers looking to make or save a buck.
Through 2016 Montana’s cigarette smuggling rate was estimated to be 22.5 percent of total consumption, according to just-completed research by the Mackinac Center for Public Policy and Tax Foundation of Michigan and Washington, D.C. respectively. These organizations have been researching and reporting on the unintended consequences of state tax policies, such as cigarette smuggling, for many years.
We used the Mackinac Center’s statistical model to measure the impact of a $2 per-pack tax hike. If adopted, the model shows, cigarette smuggling would more than double, to 46 percent of the total market. This would give the Treasure State the second-highest smuggling rate in the country, behind New York.
The model also estimates the degree to which cigarettes are smuggled in two parts: casual and commercial. Casual smuggling occurs when people cross a border to obtain cheaper smokes, typically for personal consumption. Commercial smuggling involves rolling smokes in from a distance source state, such as Virginia. Montana would see more casual than commercial smuggling at 26.5 percent. It’s not hard to see why.
Even now, each of the four states that touch Montana’s borders have lower excise taxes. Hiking the excise tax to $3.70 per pack would increase the incentive people have to get their cigarettes elsewhere. In 2005, a Journal of Health Economics study found that up to 85 percent of the after-tax change in cigarette sales can be explained by tax evasion and avoidance. While a small number may quit the habit due to large tax increases, it is far fewer than policy makers believe. Many more simply pay the price, or more likely shop around, sometimes illegally.
Importantly, the Governor’s Budget Office acknowledges this reality when estimating the revenue implications of a $2 per-pack tax increase. They estimate that higher taxes on tobacco products will reduce the purchase of taxed goods and that the difference between Montana’s taxes and our neighbors will increase the prevalence of smuggling and illicit purchases.
The consequences of tax avoidance and evasion are not the only issue. Tobacco smuggling due to high rates brings with it issues of retail theft, public corruption — a well-publicized case in Maryland saw a police officer use his cruiser to move illicit smokes, and increased criminal activity. One only needs to look at alcohol prohibition to find a parallel.
Those considerations aside, what is clear from ours and others’ research is that claims that higher tobacco taxes reduce consumption are likely overblown. The prime beneficiaries of this proposal will not be law-abiding taxpayers, but rather smugglers who will evade Montana’s tax regime.