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Flavor prohibitions will leave bad taste in states' mouths

Flavor prohibitions will leave bad taste in states' mouths
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In recent months, several states have considered bans on flavored cigarettes and vaping products. Most of the serious proposals are in the Northeast, though they’ve appeared in Virginia and Michigan, too. Outright prohibitions — especially on popular menthol cigarettes — probably will do more harm than good, as will unusually high excise taxes. Research and experience show that when cigarettes and other products are heavily taxed, the consequences mimic America’s failed experiment with alcohol Prohibition. 

Legislators in five northeastern states — New York, New Jersey, Rhode Island, Vermont and Maryland — have introduced bills to ban flavored cigarettes and vaping products in some fashion. Only Rhode Island has not considered a ban on menthol cigarettes. But lawmakers there are still trying to ban other flavored nicotine products and hike cigarette taxes by 35 cents, to $4.60 per pack. Its neighbor, Massachusetts, has passed a comprehensive ban. The confluence of outright prohibitions and high excise taxes in the Northeast could be very bad for state governments, consumers and law enforcement officers alike. 

In 2007, we built a statistical model designed to measure smuggling in most states, and we update it annually. Our study has led us to draw parallels between states that impose high excise taxes and the era of actual alcohol Prohibition, and there are many, including smuggling.  

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Smuggling is big in New York. More than 55 percent of the market there is a function of tax evasion and avoidance. On the flip side, for every 100 cigarettes smoked in New Hampshire, another 65 are smuggled out. As for Rhode Island, we estimate that the current proposal would hike taxes 8.2 percent and increase the state’s smuggling rate from 31 percent to 41 percent — and make cigarette tax revenues decline by 6.7 percent. 

It’s not hard to see why. 

There’s a mountain of money to be saved and made in tax avoidance and evasion by consumers and organized crime, respectively.  That’s why consumers and crime cells cross borders into New Hampshire, Virginia or elsewhere for cheaper cigarettes. Some 324 million packs were smuggled into New York in 2017 alone. Absent smuggling that year, New York would have raked in an additional $1.4 billion in cigarette tax revenue. And these figures reflect the trade in a product that remains perfectly legal. 

Imagine what that trade would look like if the Empire State joined Massachusetts and banned menthol cigarettes and flavored e-cigarettes. Menthol cigarettes are very popular, making up one-third of the total cigarette market. Law enforcement agencies probably would be overwhelmed by the inflow of prohibited menthol smokes, and other banned and flavored e-cigarette products likely would ride in on the existing supply chains of illicit cigarettes. 

Now imagine if all five states mentioned above banned menthol smokes and Rhode Island banned flavored e-cigarettes while raising taxes. It likely would result in a smugglers’ free-for-all. Given the East Coast’s dense population, easy access to lower-taxed sources with no menthol prohibition, and a robust port system, it’s likely that many products will be of the international and counterfeit variety. 

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Smuggling and the production of counterfeit or unregulated and more dangerous products (bathtub gin, anyone?) are just two parallels that today’s smuggled smoke trade has with alcohol Prohibition. Consider other examples: “Murder-for-hire” (New York and Virginia), retail theft (Rhode Island and Vermont), fraud (Connecticut and Massachusetts), hijacking (New Jersey) and public corruption (Maryland). 

There is no precedent for a statewide ban on menthol cigarettes or related flavored products, but there is one for a citywide ban. San Francisco outlawed menthol cigarettes in 2019. Sales of menthols there were effectively killed, while sales in neighboring San Mateo County leapt by 20 percent, according to the Store Tracking Analytical Reporting System, an industry database.

That’s probably not a coincidence and one can imagine cities located closer to San Francisco — such as Daly, nine miles away — witnessing a bigger bump. Consumers also may be getting the products they want from different counties, states, Indian reservations or international sources. Some may even use “do it yourself” with menthol-flavored oils or through homemade vaping devices and e-liquids.

Consumers do not need a nanny, and they won’t passively accept a ban. Some people like flavored cigarettes, and other flavored nicotine products, and many are willing to obtain them by crossing a border or buying online. States everywhere need to inform themselves about the data. High taxes and outright bans will lead to large-scale smuggling and other lawlessness. 

Michael LaFaive is senior director of fiscal policy for the Mackinac Center for Public Policy, a free-market research institute based in Michigan. 

Todd Nesbit is an assistant professor of economics at Ball State University. Both are individual contributors to the new Mercatus Center book “For Your Own Good: Taxes, Paternalism and Fiscal Discrimination in the 21st Century.”