How Tobacco Taxes Affect Black Market

Last updated on August 5, 2022

An increase in tobacco taxes is seen as an increase in revenue and a possible deterrent to smoking, but it remains largely unspoken that an increase in tobacco taxes leads to the expansion of its black market. Higher tobacco taxes in some states can encourage smuggling tobacco from high-tax areas to low-tax areas.

Professor David Merriman of the University of Illinois, Chicago, conducted an experiment to see the extent the illegal cigarette trade. He organized teams to collect discarded cigarette packs from garbage cans and sidewalks in hundreds of Chicago neighborhoods. After collecting thousands of discarded cigarette packs, he found that 75 percent of them had no tax stamp, which revealed that they were circulated through the black market.

While stricter laws are introduced to fight the black market, it only works in the short-term.

Tobacco smuggling can be contained by keeping the taxes on tobacco moderate. Providing incentives will encourage states to regulate the taxes and benefit from them. It would also help limit tobacco smuggling in their state. A balanced policy on tobacco taxes will go a long way in curbing the many harmful effects high taxes can have.