WASHINGTON – The trend of state and local governments increasing taxes on tobacco products has created lucrative incentives for black market cigarette trafficking between states. As a result, the sale of smuggled cigarettes is on the rise nationwide, according to the latest report from the nonpartisan Tax Foundation.

Using the latest data from the Mackinac Center for Public Policy, the report details each state’s total inflow or outflow of smuggled cigarettes in 2013. The key findings include:

• Smuggled cigarettes make up substantial portions of cigarette consumption in many states and greater than 20% of consumption in 15 states.
• The highest inbound cigarette smuggling rates are in New York (58.0%), Arizona (49.3%), Washington (46.4%), New Mexico (46.1%) and Rhode Island (32.0%).
• The highest outbound smuggling rates are in New Hampshire (28.6%), Idaho (24.2%), Virginia (22.6%), Delaware (22.6%) and Wyoming (21.0%).
• Smuggling rates jumped substantially in Illinois after hikes in state and county excise tax rates, from 1.1% of consumption in the last edition to 20.9% in this edition.
• Cigarette tax rates increased in 30 states and the District of Columbia between 2006 and 2013.
• Large differentials in cigarette taxes across states create incentives for black market sales.

The biggest change in this year’s edition of the study is in Illinois. This is likely related to the fact that the state cigarette tax rate was increased from 98 cents to $1.98 in mid-2012. This increase in smuggling may continue, as more recent increases in both the Cook County rate (from $2.00 to $3.00 per pack, effective March 1, 2013) and the Chicago municipal rate (from $0.68 to $1.18, effective January 10, 2014) have brought the combined state-county-municipal rate to $6.16 per pack, the highest combined rate in the country.

New York is the highest net importer of smuggled cigarettes, totaling 58.0% of the total cigarette market in the state. New York also has the highest state cigarette tax ($4.35 per pack), not counting the additional local New York City cigarette tax (an additional $1.50 per pack). Smuggling in New York has risen sharply since 2006 (+62%), as has the tax rate (+190%).

“Public policies often have unintended consequences that outweigh their benefits,” said Tax Foundation Economist and Manager of State Projects Scott Drenkard. “High tax rates on cigarettes have led to unreliable revenue and increased criminal activity. Policymakers seeking additional revenue would be better off choosing more stable sources that don’t incentivize black market behavior.”

Read the complete study: Cigarette Taxes and Cigarette Smuggling by State, 2013.