(The Center Square) – A report reveals the correlation between rising cigarette taxes and smuggling from other states.
The report from the nonprofit, nonpartisan Tax Foundation shows excessive tax rates on cigarettes induce substantial illicit market movement of tobacco products into high-tax states from low-tax states.
The study found that the biggest increase in the country in cigarette smuggling from 2019 to 2020 was in Illinois. That is when Illinois increased its cigarette tax rate by $1 a pack, resulting in an excise tax of $2.98. In Cook County, $3 is added on and another $1.18 from the city of Chicago, bringing the total taxes per pack in Chicago to $7.16, the highest in the country.
“Illinois jumped up to be one of the highest smuggling states in the country,” researcher Adam Hoffer said. “We have Illinois ranked as the state with the 7th highest smuggling rate. Roughly 30% of all cigarettes consumed in the state are not purchased in the state.”
The tax rate on cigarettes in Illinois has increased over 200% since 2006.
Overall, Illinois missed out on more than $334 million in cigarette taxes in 2020 due to smuggling, an increase of nearly $200 million from 2019, according to the report.
Illinois’ neighbors – Indiana, Iowa, Kentucky, and Wisconsin – all saw an increase in outbound smuggling. Outbound smuggling increased by nearly 18 percentage points in Indiana, more than $42 million worth of revenue for the Hoosier State. That moved Indiana down four spots in the ranking of states by net inbound smuggling. Wisconsin also saw an increase in outbound smuggling, adding more than $15 million for the Badger State.
Nationwide, New York continues to have the greatest rate of cigarette smuggling, with smuggled cigarettes accounting for 53.5% of total cigarette consumption in the state.
The report said policymakers interested in increasing tax rates should recognize the unintended consequences of high taxation. Criminal distribution networks are well-established and illicit trade will grow as tax rates rise, the report said.