State Out Nearly $300M from Cigarette Smuggling

Yet another unintended consequence of high excise taxes

In studies, essays and blog posts since 2008, we have noted the raft of unintended consequences associated with Michigan’s illicit trade in cigarettes. Often we zero in on smuggling itself. A quarter of all the cigarettes consumed in Michigan in 2013 were contraband.

What all too often gets left behind in the debate over cigarette trafficking is the amount of revenue lost by the state to activities that are effectively inspired by high taxes in the first place. We estimate that the Great Lakes State lost $298 million from the untaxed cigarette trade in 2013. The one sliver of good news is that the figure is down precipitously from 2012, when it was $350 million.

The graphic on the right indicates each state’s respective smuggling rate, its rank among the 47 states in our study, the estimated number of packs smuggled in, and the effect of smuggling on revenue,  to name a few columns. If the revenue number for a state is in parentheses, it means the state had a net loss of revenue from smuggling.

Some states, like Alabama, are net exporters of cigarettes. That is, for every 100 cigarettes consumed in Alabama, an additional 7.1 are smuggled out, to the benefit of its treasury. Conversely, 8.5 percent of all the cigarettes consumed in Arkansas are smuggled in; smuggling there represents a loss to its treasury of nearly $18.1 million.

The big tradeoff here for states is that, even with smuggling, revenue typically goes up after an excise tax increase, so despite these losses the treasury rakes in far more than it did before the last increase in the excise tax.

Still, to thwart smuggling and its myriad of unintended consequences, lawmakers should give serious thought to rolling back the excise tax burden in Michigan. They would need to offset these cuts with spending cuts elsewhere, but there remains plenty to cut in Michigan’s bloated, $52.3 billion state budget.

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.