It's usually true that if you want less of something, tax it. There's an exception, however, when the item being taxed can be easily smuggled in from a place with lower taxes. "Something" like cigarettes, for example.
The Tax Foundation revealed last week that rather than curbing smoking or increasing tax revenues, high cigarette taxes increase smuggling. This is obvious to anyone who thinks closely about it. Using data provided by the Mackinac Center for Public Policy, the Tax Foundation calculates that contraband smokes make up more than 25 percent of all cigarettes smoked in the 12 states that try to squeeze the most money out of their nicotine-addicted residents.
The beneficiary of high tobacco taxes are low-tax states, such as Virginia, Missouri and New Hampshire. Those states measured a surge in sales once the smugglers went about their business.
Sales figures don't keep track of where the purchaser lights up, so policymakers in states with high rates of smuggling are often lulled into thinking that a drop in sales is caused by a significant reduction in smoking. That's not true. Smokers in states with high cigarette taxes appear to be smoking as much as ever. The difference is that now smokers are addicted to bootlegged menthols.
Maryland exacts a tax of $2 on a pack. Only spendthrifts pay that much, when a quick trip across a border can score cartons for up to $17 less, since there's a tax of just 30 cents per pack in Virginia and 55 cents per pack in West Virginia. Even those who can't make a short trip across the corners of two states can usually buy a bootleg pack from someone who can, and did. The Tax Foundation estimates that 20.2 percent all cigarettes smoked in Maryland are smuggled from other states.
This is a drag on the budgets of the high-tax states. In Massachusetts, where the levy on a pack of cigarettes rose from $2.51 to $3.51 last summer, the state Revenue Department estimates a loss of nearly a quarter of a billion dollars a year in cigarette taxes owing to increased smuggling.
In its attempt to curb smoking, New York state imposed of $4.35 per-pack tax, and New York City exacts an extra $1.50, driving the average cost of a pack to nearly $12 in the Big Apple. Now 57 percent of all cigarettes smoked in New York state are smuggled. Millions of dollars are wasted on futile efforts to curb the importation of low-tax packs.
Fortunately for New York, Massachusetts, Maryland and the other states that are finally recognizing the consequences of greed, there's a solution close at hand: lower the cigarette tax so it's competitive with neighboring states. Such legislative change will be difficult, because if there's anything more addictive than nicotine, it's the politician's addiction to someone else's money.