For example, a high cigarette tax raises prices for consumers, reduces business for retailers, and generally leaves fewer resources in the private sector while placing more revenue in the hands of politicians to spend.
But there are other costs. And some of those come in the form of law enforcement having to deal with smuggling and counterfeit cigarettes. Push the tax up, and tax avoidance becomes far more lucrative.
Consider an April 10 report in the New York Times about a major cigarette ring broken by law enforcement officials in New York City. The Times noted:
Until a few weeks ago, Rafea al-Nablisi, a 40-year-old Jordanian immigrant, was one of the biggest cigarette wholesalers in the city, officials said on Wednesday. From warehouses in his home borough of Queens, they said, he sold 12,000 cartons of cigarettes a week, which made their way to store shelves in Queens, Brooklyn and New Jersey. All the cigarettes, the authorities said, were illegal in one way or another. Mr. Nablisi, they said, sold cigarettes without the required stamps that show that the excise tax had been paid; he sold cigarettes branded with counterfeit tax stamps of his own design; he sold fake tax stamps separately. And some of his cigarettes were fake Marlboros from China that might contain dangerous levels of lead, officials said.
The article added:
Illegal traffic in highly taxed commodities like cigarettes, is, of course, nothing new…
But with the state now considering doubling the $1.50-a-pack excise tax, which would bring the price of a pack of cigarettes in New York City to about $9, tax and law enforcement authorities are bracing themselves for an increase in cigarette bootlegging of all sorts.
For good measure, keep in mind that the money made from the largely tax-driven underground trade in cigarettes can wind up funding other criminal activities. In fact, a 2004 GAO report declared: “As cigarette taxes increase, so do the incentives for criminal organizations, including terrorist organizations, to smuggle cigarettes into and throughout the United States.”