High Tobacco Taxes Won’t Make the Problem Go Away

March 20, 1999 • Commentary

Oozing self‐​righteousness, anti‐​smoking activists were quick to pounce on a guilty plea by an R.J. Reynolds affiliate charged with smuggling cigarettes into Canada. One might have expected — to no avail — a parallel admission of guilt by the activists who were responsible for the huge increase in Canada’s tobacco tax during the late ‘80s and early ‘90s. As a result, smuggled cigarettes accounted for an estimated 40 percent of consumption. Later, Canada was forced to lower the tax in order to keep smuggled cigarettes away from children.

Instead of drawing the obvious lesson from the Canadian experience, industry critics proclaim that tobacco companies will henceforth have “absolutely zero” credibility when they raise the black‐​market argument. After all, the critics say, those same companies partly caused the black market. If you don’t quite follow that logic, here’s a recap: (1) tobacco companies predicted that higher taxes would provoke black‐​market activity; (2) black‐​market transactions did indeed materialize, in which at least one tobacco affiliate participated; therefore (3) we should ignore any future speculations about black‐​market activity. Got it now?

We never seem to learn. Michigan, New York, California and Maryland hike their cigarette taxes, and the result is rampant smuggling — not just from low‐​tax neighboring states, but from military bases and Indian reservations, even exports to Mexico that are smuggled back to the United States. With 23 billion packs of cigarettes sold here each year, a $1.00 bump in price will mean $23 billion in potential black‐​market profits — about four times the U.S. net income of Philip Morris, Reynolds, Lorillard and Brown & Williamson combined.

Ask yourself why 44 million adult consumers of a perfectly legal product should have to fork up because retailers and 1 million kids break laws against sales to minors that are on the books in all 50 states. The way to keep cigarettes from kids is to enforce those laws — demand proof of age, prosecute offending retailers and prohibit vending machine sales where youngsters are the primary customers. If instead we depend on price hikes to dissuade teenagers, we can count on illegal dealings dominated by criminal gangs hooking underage smokers on adulterated products without the constraints on quality that a competitive market normally affords.

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