Editor’s Note: This article first appeared in The hill on May 15, 2021.
In recent weeks, federal officials have announced policies that may increase cigarette smuggling into the United States and bring other unintended consequences.
The Tobacco Tax Fairness Act of 2021, introduced in Congress on April 22, would both increase federal excise taxes (FET) on every pack of cigarettes and adjust the tax annually for inflation to ensure automatic tax increases. In addition, the Food and Drug Administration has decided to ban cigarettes flavored with menthol, a popular type of smoke. Taken separately, either proposition would be problematic, but together they can lead to Prohibition-type anarchy, without great gains for public health.
The increase in the federal excise tax will likely increase the number of contraband cigarettes brought into the United States. the Tobacco Tax Fairness Act, if passed, would double the FET rate from $ 1.01 per pack to $ 2.02. This would widen the price differential between low tax countries and the United States and make smuggling across our borders more attractive.
National borders are of little importance when massive profits can be made from the smuggling of a product such as cigarettes. A 2016 study by the International Monetary Fund, “How to design and apply excise duties on tobaccoReports a consensus estimate, based on five expert studies, according to which the world market for illicit cigarettes accounts for 10 percent of world cigarette consumption.
This is a global average, however, and in some countries illicit markets represent more than 40 percent of total consumption. In the United States, three studies, published in 2013, 2015 and 2019, set the national rate of tax evasion and tax avoidance on cigarettes at up to 21 percent of the market. This is a number that will almost certainly jump with an increase in FET. Putting in place a mechanism to increase the tax according to the rate of inflation means that smuggling will almost always become more attractive.
I have co-authored a number of cigarette tax and contraband studies that attempt to measure cigarette smuggling rates in most of the 48 contiguous states. Until 2018, we estimate that New York was the top contraband US state, with 53% of total consumption, and California was the second with 48%. These two states, and likely others, are likely to see a huge influx of international contraband smoke entering through their ocean ports.
In the course of my research, I have reported cases of international smuggling that have highlighted how profitable international illicit trafficking can be. A illegal shipment in 2012 traveled from China to New Jersey and was eventually delivered to California by roads and highways.
The federal government is aware of the problem. In 2015, the State Department released “The global illicit tobacco trade: a threat to national security”, A document describing the effects of transnational cigarette smuggling. He observed: “Not only are criminal networks growing through the trafficking of illicit tobacco products, but they are diversifying their activities.”
These activities will only become more profitable if the excise tax is increased, especially if the Food and Drug Administration follows through on its recommendations. April proposal to ban menthol cigarettes. Menthol flavored smoke constitutes a high percentage of the legal market. Banning them outright would only add to the portfolio of products smuggled into the United States by transnational organized crime cells. Such bans have been tried in Canada and Massachusetts, and the first evidence of their success is not positive.
A number of Canadian provinces banned the sale of menthol cigarettes before a national ban was put in place in 2018. In a 2020 discussion paper titled “Intended and unintended effects of the ban on menthol cigarettesAcademics found that menthol bans “dramatically increased menthol-free smoking among youth, resulting in no overall net change in youth smoking rates.” Canadian and American researchers also found that the ban on menthol cigarettes shifted smokers’ purchases from retail outlets to First Nations reserves. Massachusetts has banned menthols as of June 2020, and first data from there, it suggests that some Bay State purchases simply shifted to other states, particularly New Hampshire.
Federal officials can have the best intentions of American citizens at heart when they seek to raise taxes or impose outright bans on particular products. Both, however, will have unintended consequences that could outweigh much of the good they hope to accomplish.
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