High Cigarette Tax Rates May Be More Harmful Than Smoking

The death of Eric Garner at the hands of the New York Police was a tragedy. It is sad every time there is a loss of human life, but Garner’s death was especially tragic for two reasons. First, he was killed while being arrested by the very people who are supposed to serve and protect the public. While it is the job of the police to protect us by enforcing the law, excessive force can have lethal results. The second reason his death was tragic was that the crime he was being arrested for was so minor.

Garner was well-known by the police as a dealer of “loosies,” or single cigarettes from packs without tax stamps. Selling loose cigarettes is illegal in states that have excise taxes on the sale of cigarettes. Garner was arrested by the NYPD for selling loose cigarettes, although he was not carrying any at the time of the arrest. Laws are by nature backed by the threat of force, but death seems a high price to pay for selling illegal cigarettes. Without the tax, Garner would not have been arrested and killed. While this logic could be reasonably extended to all taxes, excise taxes are particularly pernicious because the purpose of the tax is as much for influencing certain behavior as for raising revenue.

New York’s cigarette taxes are the highest in the nation, at $4.35 per pack. Some New Yorkers naturally will seek to avoid cigarette excise taxes, which raise the average price of a pack of cigarettes from about $8.50 to $12.85, even at the cost of breaking the law. People are tempted to buy cigarettes in a low-tax state such as North Carolina and sell them in New York.

The black market created by cigarette taxes is very real. A report from Scott Drenkard of the Tax Foundation found a positive relationship between cigarette smuggling into a state and the state’s cigarette excise tax rate. High tax rates produce an incentive for smugglers to purchase cigarettes in a low-tax state, and then sell them for a profit in a high-tax state.

New York State has the highest smuggling rate (58 percent of all consumption is smuggled) in the country. It should not be a surprise that over half of the cigarettes consumed in New York are smuggled from outside the state when its cigarette tax is over $1 per pack higher than neighboring states. The cigarette tax in New York may lower consumption, but it encourages smuggling.

The case for cigarette taxes is weakened by the findings of a new National Bureau for Economic Research (NBER) working paper by Benjamin Hansen (University of Oregon), Joseph J. Sabia (San Diego State University), and Daniel I. Rees (University of Colorado Denver). The study shows that there is a declining negative relationship between cigarette tax rates and youth smoking participation rates.

A previous study conducted using data from 1991 to 2005 found a strong, negative relationship. Using data from 2007 to 2013, however, this new study found “little evidence that cigarette taxes discourage youth smoking.” The authors attribute this change in sensitivity to both anti-smoking efforts prior to 2005—including cigarette tax increases—and to “an increasing reliance on social sources and online vendors,” which includes out-of-state smuggling.

Individuals who are sensitive to high prices for cigarettes have already been affected by the tax. From 1991 to 2011, the youth smoking rate declined from 27.5 percent to 18.1 percent. It is not clear that increasing excise taxes on cigarettes will have any further effect on youth smoking rates. Positive social pressure from friends and family as well as education about the negative health effects of smoking likely contributed as much to the decline in youth smoking as cigarette taxes.

Increasing cigarette taxes disproportionately affects the poor. Low-income individuals tend to smoke more than higher-income individuals. Some smokers may quit if the cigarette tax rate continues to rise, but those who are strongly addicted will spend more of their income on cigarettes, and less on goods such as food and preventative healthcare. While smokers may be justifiably paying the price for their decisions, higher prices also negatively affect their families.

Black markets and other forms of tax avoidance emerge when consumers want to purchase a heavily-taxed product. High cigarette tax rates may affect smoking rates, but may also lead to tragic incidents such as the death of Eric Garner.