Taxes Cause Smuggling in the US

March 21, 2014 Taxation in USA

Cigarette smugglingWASHINGTON D.C. – Increases in smuggling of cigarettes in the USA can be directly linked to increases in taxes.

Hikes to the rates of taxes and duties applied to the sale of cigarettes in the USA have led to increased levels of smuggling, with some states now seeing as much as half of all cigarettes being brought in illegally, according to a new report released on March 19th by the US think tank Tax Foundation.

The researchers of the Tax Foundation found that the cost of cigarettes faced by consumers is one of major factors behind the increase in the levels of smuggling, and such illicit activity is most likely to occur when a state government enacts a very sharp increase to the rates of taxes applied to cigarettes.

The consumption of illegitimately obtained cigarettes is most common in the states of New York, Arizona and New Mexico, where, the authors of the research, estimate that 56.9 percent, 51.5 percent, and 48.1 percent of all cigarettes are smuggled into the area.

While some states see a significant inward flow of cigarettes, a select number of areas, which charge relatively little taxes on tobacco, experience significant outward smuggling to higher tax areas, and the report showed that New Hampshire, Wyoming and Idaho currently see the largest outflows, with 24.2 percent, 22.3 percent, and 21.3 percent of all cigarettes purchased being smuggled out into another state.

According to the report, cigarette smuggling has very broad economic and social implications, as the widespread illicit trade of cigarettes not only deprives states of much needed tax revenues, but also fosters increased levels of associated crimes, as a significant portion of the smuggling activity is related to bribery, violence, and large-scale theft.

Photo by: Steven Depolo