[caption id="attachment_1787" align="alignright" width="300"] Excise Taxes on Cigarettes, by State (from Wikipedia)[/caption]

We have been talking about drug dealing this week, and today we turn our attention to the smuggling of a legal drug product: cigarettes. Differential state tax rates on cigarettes have unintended consequences, which we have discussed before. "Tobacco Road" used to refer to central North Carolina with its tobacco production and four universities with nationally competitive basketball teams. Now it is beginning to be used as a reference to I-95, which runs from some of the lowest-tax states for cigarettes (Virginia) to some of the highest (New York):

Because Virginia’s tobacco tax is the second-lowest in America, gangsters buy cigarettes there in bulk and sell them at enormous profit in New York and other high-tax states. At a minimum, they pocket a big chunk of the difference between what Virginia adds in tax—30 cents a packet—and the higher rates imposed elsewhere. New York’s tax, at $4.35 a packet, is the highest in the country.

The federal Bureau of Alcohol, Tobacco, Firearms and Explosives estimates that sales of illegal cigarettes cost government—local, state and federal—nearly $10 billion a year. For the smugglers, profits are better than those from cocaine, heroin, marijuana and guns, according to a report in September by the Virginia State Crime Commission. Moreover, the penalty for doing it—a maximum of five years in jail, under federal law—is considerably lighter than for selling drugs. If the smugglers were trafficking in heroin, they would face life in prison.

As tax rates continue to grow while remaining uneven across states, incentives for smuggling appear to be growing:

In New Jersey, where a packet of cigarettes carries a tax of $2.70, about 40% of all cigarettes are smuggled in from other states, according to the New Jersey Treasury Department. Maryland, Virginia’s neighbour to the north, reported a fourfold increase in seizures of illegal cigarettes between 2010 and 2012, though one official described the haul as the tip of the iceberg.

Anti-smoking activists love high cigarette taxes. But so do smugglers.

Further reading: Bruce Yandle's "Bootleggers and Baptists" theory (wiki, pdf, podcast)