Sky-high cigarette taxes are the new Prohibition: The consequences are eerily similar

By Michael Lafaive & Todd Nesbit. LaFaive is senior director of fiscal policy at the Mackinac Center for Public Policy. Nesbit is an assistant professor of economics at Ball State University.

"As long as New York levies a stratospheric $4.35 per pack in cigarette taxes — tied for the highest of any state — the authorities’ inability to stop smuggling should not surprise anyone. It has roots in America's past.

Our analyses of cigarette taxes and related smuggling — which we’ve been doing since 2008 — show that in 2015 an amazing 57% of all cigarettes consumed in the state were tied to tax evasion and avoidance. The catchall term “smuggling” describes this phenomenon in which cigarettes are brought in from another taxing jurisdiction, either by customers trying to save a buck or by organized criminals.

Not only are high cigarette taxes ineffective, they can be costly for governments. Law enforcement devotes substantial resources to a largely futile effort. And New York lost somewhere in the neighborhood of $1.6 billion in tax revenue due to cigarette tax evasion and avoidance in 2015.
Cigarettes are a legal product, but the excise taxes imposed on them are so high in New York (and many other states) that they create a powerful incentive for people to behave in illicit or illegal ways. This includes many similarities to the era of alcohol prohibition.

Consider just a few examples.

First, cigarette taxes lead to criminals moving illicit products for profit. As with real alcohol prohibition, people are engaging in organized crime on a wide scale. By moving cigarettes from low-tax states to high-tax states for illegal resale, syndicates can generate enormous sums. In June of last year officials arrested members of an operation that purchased 5,000 cartons per week in Virginia and North Carolina for purported resale around New York City.

Second, brazen theft. Attempts to steal from retailers and wholesalers are not uncommon today. In Brooklyn last summer a duo was aggressively walking off with about $10,000 in stolen cigarettes from multiple locations. One robbery alone netted $1,000.

During Prohibition, stealing meant robbing fellow criminals rather than retailers, and that happens with illicit cigarettes today. In 2015 one Richmond, Virginia headline read, “Robbery Victim Arrested, Charged in Cigarette Trafficking.” The victim ran illegal smokes out of his business and was apparently robbed by an employee. That same article read, “New York authorities complain traffickers there have been robbing each other of cash and valuables, readily disposable cigarettes.”

Third, murder-for-hire (yes, you read that right). As with Prohibition, operating in an illegal market carries risks beyond getting caught by authorities. Participants must sometimes settle disputes without legal mechanisms such as lawyers and lawsuits. In October 2013 two men were indicted in New York for their part in a murder-for hire gambit against people they thought were cooperating with authorities against them in a smuggling case. It is not the only instance.

The list of parallels goes on and on. Others include selling “loosies” (like shots of whiskey during Prohibition), poorly made counterfeit cigarettes (bathtub gin), public corruption, impersonating police officers, and the production of potent, homemade wine and liquor. Today people roll their own and regulate their nicotine intake by including or foregoing filters."