Prohibition by Price: Cigarette Taxes and Unintended Consequences

24 Pages Posted: 4 May 2018

See all articles by Michael LaFaive

Michael LaFaive

Mackinac Center for Public Policy

Date Written: January 3, 2018

Abstract

Cigarettes are a legal product. People who use cigarettes usually strongly prefer them. The high taxes imposed on cigarettes in various states create profit opportunities for those willing to buy them in low-tax states and ship them to high-tax states for resale. Thus, the product is attractive to lawbreakers. This chapter shows how raising cigarette taxes creates a black market for cheap cigarettes and leads to interstate smuggling. Key takeaways: (1) Cigarette taxes have increased over the last decade. Between 2005 and 2013, state governments raised taxes on cigarettes 72 times. (2) Very high tax rates in some jurisdictions result in rampant smuggling. The estimated revenues lost to cigarette tax avoidance are $5.1 billion. (3) Prohibiting a popular product leads to black market trade, crime, and violence.

Keywords: behavioral economics, tax policy, taxation, smoking, cigarettes

JEL Classification: H2, H7, H71

Suggested Citation

LaFaive, Michael, Prohibition by Price: Cigarette Taxes and Unintended Consequences (January 3, 2018). Excerpt from Adam J. Hoffer and Todd Nesbit, eds., For Your Own Good: Taxes, Paternalism, and Fiscal Discrimination in the Twenty-First Century. Arlington, VA: Mercatus Center at George Mason University, 2018., Available at SSRN: https://ssrn.com/abstract=3173841

Michael LaFaive (Contact Author)

Mackinac Center for Public Policy ( email )

140 West Main Street
P.O. Box 568
Midland, MI 48640
United States

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