Cigarette Smuggling Undermines Tax Revenue

Michigan lost $350 million in 2012

Since 2008, Mackinac Center for Public Policy analysts have periodically published estimates of cigarette smuggling in 47 of the 48 contiguous states. The numbers are quite shocking.

In 2012, more than 27 percent of all Michigan in-state consumption was smuggled. In New York, almost 57 percent of all cigarettes consumed in the state were also illicit. This has profound effects on the revenue generated by state (and sometimes local) government.

Clicking on the graphic at right brings up a chart of estimates we made for 2012. In the "smuggling rate" column a positive percentage indicates a net export state. For example, the first entry — Alabama — indicates that for every 100 packs of cigarettes consumed in the state an additional 7.7 packs are smuggled out. By contrast, the Arkansas rate of –8.05 percent tells us that just over 8 percent of all cigarettes consumed in the Razorback state are smuggled in.

The last column indicates the revenue lost or gained to state treasuries associated with smuggling. Alabama gains $9.8 million from cigarette sales smuggled to other states while Arkansas loses $17.8 million from illicit acquisition of cigarettes.

That revenue loss is tiny compared to Michigan, which lost an estimated $350 million to smuggling in 2012. The revenue figure may drop going forward as the state adopts digital tax stamping of cigarette packs to improve its tax enforcement regime. Two different columns in the graphic rank states by their smuggling rate and total packs smuggled. Michigan is 10th and 5th, respectively.

We estimate nationwide revenue losses due to cigarette smuggling at $5.5 billion, a statistic consistent with the Bureau of Alcohol, Tobacco, Firearms and Explosives' $5 billion estimate for 2009. Some cities, like New York, also impose their own cigarette excise taxes. Their revenue losses are not part of our totals.

The losses to individual states in casual smuggling — individual smuggling for personal use — are netted out with the gains to other states experiencing the increased sales. However, this does not account for North Carolina, which is the major source state for commercial smuggling — large scale, organized, long-distance smuggling — in our statistical model.

(Note: The model and accompanying explanation can be found in our 2008 study, "Cigarette Taxes and Smuggling: A Statistical Analysis and Historical Review").

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.