Saturday, January 12, 2013

Cigarette ‘Sin’ Taxes Equals Smuggling: US Edition

The populist pseudo-moralistic legislation or quasi-prohibition regulations known as “Sin taxes” have spurred growth of alcohol smuggling in the United Kingdom.

I guess the same effects can be said of cigarette taxes in the US.

Here is Joseph Henchman and Scott Drenkard of the Tax Foundation (bold mine)
Public policies often have unintended consequences that outweigh their benefits. One consequence of high state cigarette tax rates has been increased smuggling, as criminals procure discounted packs from low-tax states to sell in high-tax states. Growing cigarette tax differentials have made cigarette bootlegging both a national problem and a lucrative criminal enterprise.

Every two years, scholars at the Mackinac Center for Public Policy, a Michigan think tank, use a statistical analysis of available data to estimate smuggling rates for each state. Their most recent report uses 2011 data and finds that smuggling rates generally rise in states after they adopt large cigarette tax increases. Smuggling rates have dropped in some states, however, often where neighboring states have higher cigarette tax rates. Table 1 shows the data for each state, comparing 2011 and 2006 smuggling rates and tax changes.

New York is the highest net importer of smuggled cigarettes, totaling 60.9 percent of the total cigarette market in the state. New York also has the highest state cigarette tax ($4.35 per pack), not counting the local New York City cigarette tax (an additional $1.50 per pack). Smuggling in New York has risen sharply since 2006 (+170 percent), as has the tax rate (+190 percent).

Smuggling takes many forms: counterfeit state tax stamps, counterfeit versions of legitimate brands, hijacked trucks, or officials turning a blind eye. The study’s authors, LaFaive and Nesbit, cite examples of a Maryland police officer running illicit cigarettes while on duty, a Virginia man hiring a contract killer over a cigarette smuggling dispute, and prison guards caught smuggling cigarettes into prisons. Policy responses have included banning common carrier delivery of cigarettes, greater law enforcement activity on interstate roads, differential tax rates near low-tax jurisdictions, and cracking down on tribal reservations that sell tax-free cigarettes. However, the underlying problem remains: high cigarette taxes that amount to a “price prohibition” of the product in many U.S. states.
The ramifications of ‘Sin taxes’ appear to be parallel to direct prohibition regulations such as the war on drugs, e.g. fraud, corruption and violence.

My guess is that the same dynamics will apply to the recently enacted law in the Philippines, which will magnify accounts of the surge of incidences in general smuggling.

By the way, cigarette and alcohol bootlegging and smuggling will likely extrapolate to the Philippine government’s failure to attain revenue goals. That’s my prediction. 

On the other hand, smuggling means a shift to, and the subsequent growth of, the informal economy (the gangster "Godfather" type)

This also implies the expansion of political and bureaucratic corruption, as well as, the greater risks of potential violence, all of which have accounted for as the typical unintended consequences from such noble sounding but unrealistic, uneconomic and immoral quasi-prohibition laws as “Sin Taxes”.   

I might add that since bootlegging means black market production of alcohol and cigarettes, one may also expect an increase of illness of health problems related to these products.  

It has been said that the path to hell is paved with good intentions. This applies to Sin Taxes

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