Last month, the Tax Foundation released a study analyzing the relationship between cigarette taxes and smuggled cigarettes in each state.
The study is based on data gathered by the Mackinac Center for Public Policy. The results showed that states with high taxes had large numbers of cigarettes smuggled into their state and sold there. The study’s authors claim that there is a correlation there, and that high taxes on goods like cigarettes create black markets, as cigarettes are brought over state lines from states with lower taxes.
“High tax rates on cigarettes have led to unreliable revenue and increased criminal activity,” said Tax Foundation Economist and Manager of State Projects Scott Drenkard. “Policymakers seeking additional revenue would be better off choosing more stable sources that don’t incentivize black market behavior.”
According to the authors, Illinois offers a clear cut example of how raising taxes on goods creates black markets. In an attempt to raise revenue, the state doubled its cigarette tax in 2012. In 2013 1.1% of Illinois cigarettes were smuggled into the state. In 2014, that number had risen to over 20%.
New York is the most extreme case in the study, with an incredible 58% of cigarettes consumed in that state having been smuggled in from nearby states. On the other end of the spectrum is New Hampshire, which actually exports 28.6% of its cigarettes to other states, such as Maine.
Over 10% of cigarettes in Maine are smuggled in from out of state, according to the Tax Foundation. This puts Maine roughly in the middle of the pack, but still losing tax revenue to neighboring New Hampshire. The percent of cigarettes smuggled into the state has dropped 6% since 2006, possibly due to rising cigarette taxes in New Hampshire and Canada.