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Chicago can’t get away from smuggling

During Prohibition of the twenties and thirties, Al Capone made Chicago the center of booze smuggling, as he brought in so much whiskey from Canada, because he could sell it for a higher price in the U.S. where it was prohibited, than he paid for it in Canada.  Now, Chicago is once again becoming a center for smuggling, but this time it is cigarettes.

This St. Louis Post-Dispatch article tells us that that city is raising the tax on cigarettes by a $1 so that the total city, county, and state tax is $6.67 per pack, bringing the price of a pack of cigarettes to almost $11 per pack.  The federal tax on cigarettes now stands at $1.01 per pack.  In addition to those taxes on cigarettes is price component of well over a $1 per pack that is being charged by the cigarette manufacturers to pay the state tobacco settlements, a payment that is based on the number of packs sold in that state (and so, part of the companies’ marginal costs).

You can see the various taxes paid across the states before the increase in Chicago’s city taxes here, from Tobacco Free Kids.

What should be noted is that the tax in Missouri is only $0.17 per pack, though many Missouri counties and cities have small local taxes on cigarettes.  Still, this means that a pack of cigarettes in Chicago will have a tax on them of $6.50 higher in Chicago than in many places around Hannibal, MO, only about 300 miles away.  $6.50 may not be enough to drive 300 miles, but consider that a carton of cigarettes is $65 higher in taxes in Chicago than most places in Missouri, and a van could probably hold a thousand cartons, the incentive for cigarette smuggling is powerful.

Many in favor of higher state cigarette taxes cite the health benefits of taxes in lowering tobacco consumption, but the effect of state taxes is smaller than many seem to think.  While state tax increases do lower the sales of cigarettes in those states (law of demand), much of the drop in sales in the state is because of increased incentives to trade across borders.  In 1995, a paper of mine came out in the National Tax Review where I developed a technique for estimating the effect that an increase in state cigarette tax has increasing the cross-border sales of cigarettes.  What I found was that about 80% of any decline in state cigarette sales because of a tax increase were replaced by cigarettes purchased from other states and only 20% of the reduction in sales were from reductions in smoking.

While the St. Louis Post-Dispatch article cited above suggests that some of the revenues will be devoted to increased enforcement effort, I think even more will be needed.

-MC

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