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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

6 Responses to “Chicago can’t get away from smuggling”

  1. DJ says:

    I believe that at some point, prohibitive costs may make a dent in the smoking population, especially with easy access to smoking cessation medication and the e-cigarette. However, there are certain sectors of the population who are more than willing to pay to travel to buy cartons of cigarettes where significantly lower taxes are imposed. This casual smuggling would not likely impact revenue, but criminal smuggling could certainly offset the gains expected from increasing cigarette taxes. Whenever a need arises, currently for lower priced cigarettes or during prohibition in the early 20th century, there will be opportunistic people who fill that need by whatever means necessary. I agree with you that for significant benefit to be realized from increased taxation anti-smuggling enforcement will need to be increased.

  2. MPC says:

    The government does not really care if people quit smoking or not, everything is money and how is it possible to get more. Everybody knows that a smoker will still purchase cigarettes if they can not find it cheaper anywhere, is less likely to see somebody quitting an addiction since is not an easy thing to do. People will find a way to get their desire product as cheap as possible, increasing the price will bring more surplus.

  3. Scott says:

    I agree with both Raymond and Tiffany in that the raising of cigarette taxes is not to help people quit, but to make easy money. No matter the price of cigarettes, people will buy them if they are hooked. The government sees this as an easy way to make money off of people who will buy cigarettes no matter the price.

  4. Raymond says:

    Raising taxes on cigarettes is just a way to make money. The reason of trying to get people to quit is just a scapegoat. People who want to smoke will find a way to smoke, and most people will buy it the cheapest way possible. These taxes will be like a buisness decision. If Chicago looses to much of their cigarette buisness to smuggling, they will probally have to lower the taxes back down.

  5. Tiffany says:

    When first reading about the raised taxes on cigarettes in Chicago, I thought that it would be a good idea. Help people quit smoking by making them not want to buy them because they are so expensive. After reading on, I quickly changed my mind. It really does not make any sense to raise the taxes on cigarettes because people will find ways around paying the high prices, such as smuggling. I know personally, if I smoked a pack a day, I would also drive out of state to stock up on cheap cigarettes. The government should leave the taxes on cigarettes alone and find a more productive way to make more money.

  6. morris.coats says:

    I just noticed that my 1995 National Tax Journal paper keeps getting mentioned. This time in a Minnesota commentary at the Center for the American Experiment: http://www.americanexperiment.org/publications/commentaries/the-law-of-unintended-consequences-higher-cigarette-taxes-mean-more-smuggl
    =MC

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