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74
TOBACCO BUSINESS INTERNATIONAL
MAY/JUNE 2015
Op-Ed
T
he Washington State Legislature
appears again poised to go to the
cigarette excise tax well. A proposal
to hike the state’s excise tax by another 50
cents to $3.52 per pack would exacerbate an
already large smuggling problem and offer
little in the way of gains to public health.
We have created a statistical model to
measure the degree to which cigarette
smuggling occurs in most of the United
States.Through 2013, our model reported
that Washington had the third-highest
smuggling rate among 47 states. Our
estimate shows that, of all the cigarettes
consumed in Washington that year,
46.4 percent were obtained as a result
of tax evasion or avoidance. The state’s
smuggling rate would be four points
higher if we did not subtract out cigarette
smuggling exports going to Canada.
We are not the only team of scholars
to tag Washington state with a very high
smuggling estimate. On February 19,
the National Research Council and the
Institute of Medicine released its own
state-by-state smuggling estimates in
a report titled “Understanding the U.S.
Illicit Tobacco Market: Characteristics,
Policy Contest, and Lessons from
International Experiences,” in which they
estimate Washington’s smuggling rate for
2012 at 45.5 percent.
In other words, two groups of analysts
working independently made nearly
identical smuggling estimates. Even if
both are off by 10 or 15 percentage points,
Washington still has a rampant problem
that could get even worse.The state’s own
smuggling estimate for 2013 was 32.9
percent of the total market.
To measure the future impact of adding
50 cents per pack onto the state’s existing
tax, we reran our model at the higher
rate. It reports that smuggling will leap to
52.5 percent of the total market, moving
Washington into second place among
smuggling states behind only New York
state, whose smuggling problems are
exacerbated by New York City’s municipal
excise tax of $1.50 and its proximity to
tobacco state Virginia.
Perhaps more instructive is that the
model is informing us that Washington is
getting dangerously close to the point at
which revenues from a higher excise tax
will turn negative. We estimate that the
higher excise tax will only raise about 3.3
percent or $13.5 million more than it does
now due to a drop in legal paid sales of
11.4 percent.
It is worth noting that the state’s
own estimates aren’t too different. They
estimate new revenues of $18 million
to $20 million in the year following the
hike and a legal paid sales decline of 9.5
percent.
As a large percentage of Washington’s
population lives along the Interstate-5
corridor, it does not strain credulity
to suggest that large amounts of illicit
cigarettes are being trucked up from
Oregon, which maintains an excise tax of
just $1.31 per pack. We also suspect that
Washington’s busy port system facilitates
the illegal transit of untaxed smokes, but
our model is not yet designed to measure
that.
We do recognize that supporters of
such tax hikes for health reasons are
well-intentioned, but evidence suggests
that illicit sources of smokes may be
undermining their goals.
In 2004, economist Mark Stehr
published a paper that suggested up to
85 percent of the change in legal paid
sales of cigarettes may be attributed to tax
avoidance or evasion rather than to people
ending their smoking habits.
The authors of a 2014 study,“DoHigher
Tobacco Taxes Reduce Adult Smoking?”
published in the peer-reviewed
Journal
of Economic Inquiry
, are skeptical as well.
They write: “Considering all the evidence,
we conclude that there is insufficient
justification for the widespread belief that
raising cigarette taxes will significantly
reduce cigarette consumption among
adults—even young adults.”
The reasoning behind this is simple:
people turn to illicit markets for cheaper
(and, we argue, sometimes more
dangerous) alternatives and those who still
smoke have a strong preference for doing
so. Lawmakers should never confuse a
decline in legal paid sales with a decline in
smoking rates. The former need not lead
to the latter, especially to the degree that
health advocates hope.
By opposing a further cigarette excise tax
increase,Washington legislators will avoid
forcing residents to accept substantial
increases in lawlessness in exchange for
modest reductions in smoking rates.
TBI
Michael LaFaive is director of fiscal policy
with the Mackinac Center for Public Policy
in Midland, Michigan. Todd Nesbit, Ph.D.,
is a senior lecturer in economics at Ohio State
University and a member of the Mackinac
Center’s Board of Scholars.
Why an Excise Tax on
Cigarettes Won’t Work
Fewer legal sales won’t necessarily mean lower smoking rates.
By Michael D. LaFaive and Todd Nesbit, Ph.D.