Are Tobacco Taxes Really Doing Good?

Last updated on August 5, 2022

An increase in tobacco taxes is used to bring in revenue and deter smoking, but does higher taxes really achieve this? The answer is disappointing. Higher taxes on tobacco can expand its black market.

Huffington Post shares particulars of how an increase in tobacco taxes encourages black markets. “In New York City, a legal, fully taxed pack of cigarettes costs $10-15; Chicago prices are only slightly less. Working class and poor addicted smokers (i.e., most smokers) thus face great temptation to enter into the black market. Columbia University Professor Shelley Cantrell documented that “the $5 man” — a street seller of untaxed black market cigarettes — is now a pervasive feature of life in low-income New York City neighborhoods.

Extremely high cigarette taxes are widely evaded. Professor David Merriman of the University of Illinois at Chicago organized teams of apparently non-squeamish research assistants to gather discarded cigarette packs from garbage cans and sidewalks in 100 Chicago neighborhoods. He discovered that 75 percent had no tax stamp, indicating a black market or grey market provenance.

An across-the-board increase in federal tobacco taxes would not only expand black markets in high-tax areas, it would also do nothing to address the widespread smuggling of cigarettes to high tax states from states where cigarette taxes are ridiculously low. Such smuggling is not driven by cash-strapped college kids with a few cartons in their backpacks. Organized crime groups, and even terrorist organizations, are the big players in the lucrative trade.”

Mostly, it is the law enforcement that is chosen as the remedy to the problem. In Canada, where 15 percent of all cigarette sales are illegal, the government is planning stiffer punishment for the guilty.

The solution to the problem is not one, but many. Huffington Post believes “the challenge for federal tax policy on cigarettes therefore is to avoid feeding black markets in high-tax states, to shrink cross-state tobacco smuggling operations, and, to increase tobacco taxes in those states where taxes have room to grow without creating black markets. A flat increase in the tobacco tax cannot serve all three goals, but a more creative tax policy could.

States adapt quickly to federal tax policy incentives. When the federal government allowed states to keep estate taxes up to a certain financial amount, almost every state set their estate taxes accordingly, creating rough parity throughout the country. The same approach could be applied with federal tobacco taxes. Specifically, the federal government could refund federal tobacco taxes to any state that keeps its own tobacco taxes within a particular range.”

Instead of a one-shoe-fits-all policy with tobacco taxes, it would be better if taxes are altered in tandem with other methods to curb smoking. Raising taxes as the only solution to limit smoking can create unpleasant side-effects that will again need treatment.