(The Center Square) – High tax rates on cigarettes induce smuggling of tobacco products from low-tax states or foreign sources into high-tax states, the Tax Foundation reported Tuesday.
“People respond to incentives,” the “Cigarette Taxes and Cigarette Smuggling by State, 2020” report said. “As tax rates increase or products are banned from sale, consumers and producers search for ways around these penalties and restrictions.
“In cigarette markets, consumers tend to shop across borders where the tax rates are lower and dealers develop black and gray markets to sell illegally to consumers, paying little or no tax at all. Growing cigarette tax differentials have made cigarette smuggling both a national problem and a lucrative criminal enterprise.”
The Mackinac Center for Public Policy has studied cigarette smuggling rates since 2008. It reported in June that Iowa’s rates in 2020 were about average for the 47 states included in the report. Mackinac Center for Public Policy excluded Hawaii and Alaska from the report because of the difficulty of modeling noncontiguous states.
North Carolina was also excluded since it is the source state for the report’s “commercial smuggling” calculations.
According to the Tax Foundation’s report, Mackinac Center’s report finds a strong correlation between cigarette smuggling and tax rates across contiguous states and the District of Columbia.
Illinois had the biggest increase in smuggling from 2019 to 2020, the Tax Foundation reported. The state raised its tax rate by $1 per pack, to $2.98. Chicagoans had $3 per pack Cook County taxes and $1.18 per pack city of Chicago taxes, so taxes on a pack of cigarettes amounted to $7.16 per pack, the report said.
Cigarette smuggling increased by more than 14 percentage points in 2020, which was more than all other states combined, and the state’s inbound smuggling rate rose from 16th highest to seventh in the contiguous United State. Because of that smuggling, Illinois didn’t receive $334 million in cigarette taxes. The rate increase effectively lost the state $199 million in revenue, the report said.
Meanwhile, Illinois’ neighbors, including Iowa, had increases in outbound smuggling.
Since 2006, Iowa has nearly tripled its tax rate, with a 278% increase, but its tax rate didn’t change from 2019 to 2020. After Illinois changed its cigarette tax rate, Iowa’s outbound smuggling rate increased by 2.0 percentage points, moving the state one place down in net inbound smuggling rankings. The state gained $4.5 million in revenue through outbound smuggling.
Outbound smuggling rose even more in Indiana following Illinois’ tax increase. A 17.7-percentage point increase in Indiana created more than $42 million in revenue for the Hoosier State.
In 2020, Iowa’s inbound smuggling rate was 7.81%, or 23rd highest in the country, with nearly 11.1 million smuggled packs, which was the 21st highest number in the nation, Mackinac Center reported. Outbound smuggling lost the state about $15 million in revenue. The state tax was $1.36 per pack.
Illinois ranked seventh in smuggling rate; 29% of cigarettes consumed in the state were smuggled. It ranked fifth in quantity of smuggled packs, with more than 112 million.
As of January 2022, Iowa’s $1.36 state excise tax on cigarettes was 32nd highest in the nation, Federation of Tax Administrators reported. Illinois’ tax rate, $2.98, ranked 12th.
