Fanning the flames: Feds may adopt problematic tobacco policies

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In recent weeks, federal officials have announced policies that are very likely to increase cigarette smuggling into the United States and bring other unintended consequences.

The Tobacco Tax Equity Act of 2021, introduced in Congress on April 22, would both raise federal excise taxes (FET) on each pack of cigarettes and adjust the tax each year for inflation to ensure automatic tax hikes. In addition, the Food and Drug Administration has moved to ban menthol-flavored cigarettes, a popular type of smoke. Taken separately, either proposal would be problematic, but together they may lead to Prohibition-style lawlessness, without big gains for public health.

Raising the federal excise tax will likely raise the number of smuggled cigarettes trafficked into the United States. The Tobacco Tax Equity Act, if adopted, would double the FET rate from $1.01 per pack to $2.02. This would widen the price gap between low-tax countries and the U.S. and make smuggling across our borders more attractive.

National borders are of little consequence when massive profits can be made by smuggling a product such as cigarettes. A 2016 study by the International Monetary Fund, “How to Design and Enforce Tobacco Excises,” reports a consensus estimate, from five expert studies, that the world’s illicit cigarette market amounts to 10 percent of world cigarette consumption.

That’s a global average, though, and in some countries, illicit markets account for more than 40 percent of total consumption. In the United States, three studies, published in 2013, 2015 and 2019, pegged the national cigarette tax evasion and avoidance rate at up to 21 percent of the marketplace. This is a figure that will almost assuredly leap with an increase in the FET. Establishing a mechanism for increasing the tax based on the inflation rate means smuggling will almost always become more attractive.

I am co-author of a number of cigarette tax and smuggling studies that attempt to measure cigarette smuggling rates in most of the 48 contiguous states. Through 2018, we estimate, New York was America’s No. 1 smuggling state, at 53 percent of total consumption, and California was number two at 48 percent. Both of these states, and likely others, will probably see a huge influx of internationally smuggled smokes coming in through their ocean ports. 

As part of my research, I’ve reported international smuggling busts that have underscored just how profitable illicit international trafficking can be. One illegal shipment in 2012 came all the way from China to New Jersey and was ultimately delivered to California via roads and highways.

The federal government is aware of the problem. In 2015, the State Department published “The Global Illicit Trade in Tobacco: A Threat to National Security,” a paper that outlined the effects of transnational cigarette smuggling. It observed, “Not only are criminal networks expanding through the trafficking in illicit tobacco products, but they are diversifying their activities.” 

These activities will only become more profitable if the excise tax is raised, especially if the Food and Drug Administration follows through with its April proposal to ban menthol-flavored cigarettes. Menthol flavored smokes constitute a high percentage of the legal market. Prohibiting them outright would just add to the portfolio of products smuggled into the United States by transnational organized crime cells. Such bans have been tried in Canada and in Massachusetts, and early evidence for their success is not positive.

A number of Canadian provinces banned menthol cigarette sales before a 2018 national prohibition took place. In a 2020 working paper titled “Intended and Unintended Effects of Banning Menthol Cigarettes,” university scholars found that bans on menthols “significantly increased non-menthol cigarette smoking among youths, resulting in no overall net change in youth smoking rates.” The Canadian and U.S. researchers also found that bans on menthol cigarettes shifted smokers’ purchases from retail outlets to First Nations reserves. Massachusetts banned menthols starting in June 2020, and early data from there suggests that some Bay State purchases simply moved to other states, especially New Hampshire. 

Federal officials may have the best intentions of U.S. citizens at heart when they work to hike taxes or impose outright bans on particular products. Both, though, will come with unintended consequences that may offset much of the good they hope to accomplish.

Michael LaFaive is the senior director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute located in Midland, Mich. Follow him on Twitter @lafaive.

Tags federal excise tax on cigarettes Illicit cigarette trade Menthol cigarette Tobacco

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