Can MA Regulate Marijuana When it Can’t Regulate Tobacco?

Saturday, December 21, 2013

Zeke Wright, GoLocalWorcester Contibutor

“Bootlegging” is making a comeback in states with high tobacco sales taxes like Massachusetts, where one in five cigarettes is smuggled in by one estimate.

That analysis comes from the Mackinac Center for Public Policy, a nonpartisan research group that draws a direct correlation between tobacco taxes and the drug's illicit distribution.

Taxation's effects on tobacco sales has an ancillary component now as states contemplate “tax and regulate” marijuana laws as a new revenue source modeled around the sale of tobacco.

But the claim is hotly contested by organizations that support higher taxes as a method of discouraging tobacco use, like the national Campaign for Tobacco-Free Kids, which calls the idea of taxes promoting black markets a “cigarette company myth”.

“The Mackinac Center's recent report is based on seriously flawed methodology,” said the campaign's Vince Willmore, adding the report was “intended to help tobacco companies fight tobacco tax increases rather than to provide factually accurate information about cigarette smuggling.”

Comparing reported smoking rates to sales

The Michigan-based, conservative-leaning Mackinac Center has researched tobacco smuggling in the contiguous United States every two years since 2008. The latest study released this year includes data from 2011.

“State and local levies have grown so onerous in some parts of the country that they almost could be called 'prohibition by price,'” contend study authors Michael LaFaive and Todd Nesbit in a release.

In state-by-state rankings of net smuggling, Massachusetts ranks 19th.

The center's statistical model compares actual legal sales against predicted consumption based on reported smoking rates. The difference represents the estimated amount of smuggled cigarettes.

Contraband tobacco comes from out of state in a variety of ways, including unreported online sales, “casual” smuggling by individuals, or by commercial enterprise.

Mackinac Center: smuggling correlates with tax rates

New York holds the top position as the highest net importer of smuggled cigarettes in 2011, under the institute's analysis, with contraband cigarettes totaling 60.9 percent of the total market. “Not coincidentally, New York also has the nation's highest state cigarette tax,” LaFaive and Nesbit write in this year's release.

The consequences, they said, include corruption, violence, theft, and counterfeiting.

Massachusetts was notable for its rising market for smugglers, according to the institute: The state advanced 13 spots after a tax increase from $1.51 to $2.51 per pack in 2010.

Massachusetts commission studies issue

The topic has captured the attention of Bay State legislators, who created an Illegal Tobacco Commission in the fiscal year 2014 budget to study the economic impact of the illegal tobacco market in the state.

That commission first convened in late October and is expected to issue its findings by March of next year.

“Tobacco smuggling is a growing problem that we share with many states,” said Amy Pitter, Massachusetts' revenue commissioner, in a written release.

In a presentation to the commission last month by the department of revenue's director of tax policy and analysis, Kazim Ozyurt, he said studies looking at the issue came to widely different conclusions on how much tax avoidance actually takes place.

A 2011 U.S. Government Accountability Office report identifying different tax avoidance schemes says the illicit tobacco trade offers relatively high rewards and low risks compared to other crime.

Smuggling “overinflated” by big tobacco

For the Campaign for Tobacco-Free Kids, tax avoidance is essentially a non-issue when considering tobacco tax hikes.

“Massachusetts and Rhode Island are on the right track with tobacco taxes,” said the campaign's Willmore.

“We agree that cigarette smuggling is a problem that should be addressed, but Mackinac has consistently overinflated how much smuggling is occurring,” he continued, calling tobacco tax increases “one of the most effective ways to reduce smoking.”

According to the campaign, tax hikes have universally resulted in increased state revenue, as well.

“Because (tobacco companies) can't dispute that key fact, the industry makes — and funds others to make — misleading arguments to distract the debate from the real issue.”

Around New England

Rhode Island, with the second-highest tax rate on a pack of cigarettes in 2011, had the fifth highest rate of smuggled cigarettes — nearly 40 percent of those smoked according to the Mackinac Center.

Elsewhere in New England, the institute estimated 22 percent of cigarettes in Connecticut were smuggled into the state, while that percentage was nearly 14 for Maine.

New Hampshire and Vermont, states with comparatively low tobacco taxes, were net exporters of illegal cigarettes, with nearly 27 percent and 17 percent of cigarette sales ultimately leaving the state, respectively.

According to Willmore, “the best solution to the problem of interstate cigarette smuggling is for low-tax states, such as New Hampshire, to increase their cigarette taxes.”

Such a step would produce health benefits in those states while reducing smuggling and tax evasion, he said, identifying other steps states can take like “high-tech tax stamps” that allow for easy identification of legal or illegal cartons by law enforcement.

Related Slideshow: Black Market Cigarettes in New England

Scholars at Michigan's Mackinac Center for Public Policy have analyzed tobacco sales data to estimate smuggling rates for each state.

The report uses 2011 data and finds that smuggling rates generally rise in states after they adopt large cigarette tax increases. Smuggling rates have dropped in some states, however, often where neighboring states have higher cigarette tax rates.

This means that people are buying cigarettes in lower-taxed states legally, and bringing them into nearby higher-taxed states to sell at a lower price with higher profits.

See which New England states have the highest percentage of smuggled cigarettes in the slides below:

Source: Mackinac Center for Public Policy; Tax Foundation.