Our estimates indicate that in 2009, the five destination states with the highest inbound cigarette smuggling rates were Arizona, where it represented 51.8 percent of the state’s total consumption; New York, where it represented 47.5 percent; Rhode Island, with 40.5 percent; New Mexico, with 37.2 percent; and California, with 36.3 percent. (See Graphic 2.) Arizona was not in the top five when we updated the 2006 numbers in 2009, yet we estimate that Arizona now has the nation’s highest inbound cigarette smuggling rate, with over half of all of the state’s cigarette consumption coming from smuggled sources.
This is noteworthy. In 2007, Arizona had already increased its state excise tax on cigarettes from 118 cents per pack to 200 cents,[5] but in 2009, the U.S. government increased the federal cigarette excise tax from 39 cents per pack to 100.66 cents.[6] Together, these tax changes resulted in a full 143.66-cent-per-pack increase, raising the incentive to smuggle cigarettes from Mexico to Arizona.[*]
Since our 2009 revision, five destination states have moved up by double digits in the state rankings of net smuggling rates: Texas, from 16th to 6th; Maryland, from 24th to 9th; South Dakota, from 28th to 12th; Iowa, from 33rd to 15th; and Mississippi, from 37th to 22nd. These large smuggling rate increases relative to those of other states can likely be attributed to the five states’ substantial state excise tax increases during the past three years. Texas increased its per-pack cigarette tax from 41 cents to 141 cents in 2007;[7] Mississippi, from 18 cents to 68 cents in 2009;[8] South Dakota, from 53 cents to 153 cents in 2007;[9] Maryland, from 100 cents to 200 cents in 2008;[10] and Iowa, from 36 cents to 136 cents in 2007.[11]
Similarly, four states declined by double digits in state rankings of net smuggling rates: Illinois, from 17th to 30th; Pennsylvania, from 21st to 31st; Massachusetts, from 13th to 32nd; and Nevada, from 29th to 41st. While many other states since 2006 have approved increases in their cigarette excise taxes, none of these four states had changed their cigarette tax rate by the close of fiscal 2009.[†] As neighboring states increased their tax rates, the average cross-border tax differential of these four states consequently declined, leading to a decrease in net smuggling into the state or even an increase in net smuggling out of the state.
At the far end of the spectrum, five source states had estimated net total smuggling exports that exceeded 10 percent of total state consumption: Virginia, Delaware, West Virginia, Missouri and Wyoming. (North Carolina would certainly be on this list as well, were it not excluded from the model due to its treatment as the base source of commercial smuggling.) Delaware and Virginia in particular stand out; smuggling out of Delaware is estimated at more than 28 percent of its in-state consumption, while smuggling out of Virginia is estimated at more than 56 percent of its in-state consumption. These high estimated rates are not surprising. Delaware’s state excise tax of 115 cents per pack[‡] is safely below the rates of its neighboring states, with Maryland at 200 cents per pack, New Jersey at 257.5 cents per pack and Pennsylvania at 135 cents per pack. Similarly, Virginia’s cigarette excise tax of 30 cents per pack is safely below the tax rates of its neighbors.
Graphic 2: State Cigarette Smuggling as a Percentage of Total State Cigarette Consumption (Legal and Illegal), 2009
Notes: Estimates computed based on regression results presented in columns 3 and 4 of Graphic 12 (see the Appendix). The smuggling percentage is negative when the state is a net importer of smuggled cigarettes, and the percentage is positive when the state is a net exporter of smuggled cigarettes. The sum of commercial, casual and Canada/Mexico smuggling does not equal the totals presented in the final column due to the nonlinear nature of the model. North Carolina, Hawaii and Alaska are not included.
The state of Michigan has the 10th highest 2009 smuggling rate among 47 contiguous states. As Graphic 3 suggests, the smuggling rate for Michigan mirrors its tax rate. (Note that the numbers on the right-side axis indicate rates of smuggling imports and thus are the negative of the smuggling rates reported in other graphics.)
Graphic 3: Michigan Cigarette Tax Rates and Estimated Total Smuggling Import Rates, 1990-2009
[*] The increase in the federal excise tax in 2009 can also help explain Texas’ rise in the rankings of net smuggling imports as a percent of consumption.
[†] Pennsylvania did raise its cigarette tax in November 2009, after the end of the 2009 fiscal year. Ibid., 10.
[‡] Delaware raised its state cigarette tax to $1.60 per pack after the conclusion of fiscal 2009.
[5] “The Tax Burden on Tobacco: Historical Compilation, Volume 44, 2009” (Arlington, Va.: Orzechowski and Walker, 2009), 9.
[6] “Tobacco: Federal Excise Tax Increase and Related Provisions” (U.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau) http://www.ttb .gov/main_pages/schip-summary .shtml (accessed Dec. 12, 2010).
[7] “The Tax Burden on Tobacco: Historical Compilation, Volume 44, 2009” (Arlington, Va.: Orzechowski and Walker, 2009), 10.
[8] Ibid., 9.
[9] Ibid., 10.
[10] Ibid., 9.
[11] Ibid.