If history is any indicator, like New York, Chicago can expect to see an invigorated cigarette black market, an increase in the crime and menace that comes with black markets, the presence of international terrorist organizations that fund themselves with bootlegged cigarettes, and as is always the case with ”sin” taxes, poor Chicagoans can expect to bear the brunt of the tax.
For 50 years, New York City has levied the most expensive tobacco taxes in the country. And for 50 years, it has battled the ancillary effects of black market cigarettes. In a policy study published last year by the Cato Institute, Patrick Fleenor tracked a half‐century of the Big Apple’s lust for the tobacco sin tax, and the corresponding increase in crime that came with it.
Each time the city raised its cigarette taxes, taxed cigarette sales dropped in the city but skyrocketed in jurisdictions all around the city, where taxes were lower. At the same time, law enforcement uncovered more cigarette bootlegging operations, most run by organized crime syndicates. In 1989, city tax official Robert Shepherd told a gathering of tax administrators that in New York City, ”It is literally more profitable to hijack a cigarette delivery truck than an armored truck.”
In recent years, New York City’s black or ”gray” cigarette market has aided a bevy of international terrorist organizations and nefarious elements, including the Russian mafia, Chinatown gangs, the Irish Republican Army, Hezbollah and al‐Qaida. In 2002, Hezbollah ringleader Mohammad Youssef Hammoud was arrested in Charlotte, N.C., for operating a cigarette smuggling ring that bought low‐tax cigarettes in North Carolina and sold them on the black market in high‐tax Michigan. Just one van of cigarettes making the trip could bring in as much as $10,000 for the terrorist group.
London is one of the few cities where cigarette taxes are higher than they are in New York. No surprise, the Irish Republican Army has exploited those taxes for years, and uses smuggling to partially fund its operations. Over the last several years, Sweden and Canada have reduced their cigarette taxes after determining that the harm wrought by black markets outweighed the generated revenue or costs saved by people persuaded by the tax to quit smoking.
The day after the new tax in Chicago took effect, the Associated Press reported that cigarette retailers in Northwest Indiana saw a surge in sales. Indiana retailers say they expect a windfall in a state where tobacco taxes are 45 percent lower than they are in Chicago. Part of those sales will likely come from smokers willing to drive across the border to stock up. But it would be naive to think a significant portion of new sales wouldn’t go to bootleggers motivated by increased profit margins.
Sin taxes are popular with politicians because they generate revenue. At the same time, officials can claim that revenue with a certain moral rectitude because it’s generated by behavior many people find undesirable. It’s certainly easier to sell a tax on bad habits than increase taxes on hard‐earned income.
But sin taxes are also terribly regressive. Not only are the poor more likely to smoke, they spend a far greater percentage of their income on tobacco when they do. And a 2001 report by the Congressional Budget Office concluded that while tobacco taxes encourage people to quit smoking, those people are most likely to be from the middle‐ and upper‐income brackets, probably because the affluent can afford to try more effective anti‐smoking programs, more easily substitute another vice for tobacco, or generally are less likely to need solace in the butt of a cigarette.
That means an already regressive tax actually grows more regressive over time, as more middle‐ and upper‐income people quit, while lower‐income people continue to smoke. Meanwhile, government grows as dependent on the sin tax’s revenue as taxpayers are dependent on the sin.
As anti‐smoking ordinances continue to sweep the country, it’s not at all surprising to see city officials attempt to capitalize on anti‐tobacco fervor. But factor in the costs of black market crime, increased burdens on law enforcement, revenue boosts to organized crime and international terrorism, and that the tax disproportionately falls on the poor, and the idea of government cashing in on bad habits begins to lose a bit of its luster.