A new report from the Tax Foundation states that excessively high cigarette taxes have resulted in a significant amount of tobacco products flooding the black and gray markets of high-tax states in the US, sourced from low-tax states or foreign countries.
According to estimates, New York has the highest number of illegal inbound cigarette smuggling activities, with 53.5% of cigarettes consumed in the state in 2020 originating from smuggled sources. Following closely behind are California (44.8%), New Mexico (45.5%), Washington (41.5%), and Minnesota (34.8%).
New Hampshire has the highest net outmigration of smuggled goods among states, accounting for 52.4% of consumption. This may be due to comparatively low tax rates and its proximity to high-tax states in the northeastern United States. Following closely behind are Indiana (35.6%), Virginia (27.6%), Idaho (25.8%), Wyoming (24.4%), and North Dakota (18.6%).
In the span of 2019 to 2020, Illinois and New Mexico substantially increased their cigarette tax rates. As a result, both states have seen a significant rise in cigarette smuggling activity.
Policy makers interested in raising tax rates should be aware of the unintended consequences of high taxes," wrote the Tax Foundation on its website. "Criminal distribution networks are already well-established, and as tax rates increase, illegal trade will grow.
The author emphasizes that excessive taxation is not the only driving force behind illegal trade. They believe that measures such as spice bans and reducing nicotine content could also push tobacco sales into the illicit market.
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