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MA Cigarette Tax Hike Could Boost Illicit Sales

Wednesday, January 30, 2013


Governor Deval Patrick has proposed increasing the state's cigarette excise tax by $1 to $3.51 per pack in his Fiscal Year 2014 budget, but some policy analysts said the tax hike will only drive smokers across the border and to back channels for cheaper cigarettes.

A recent report by the Mackinac Center for Public Policy estimated that over 18 percent of cigarettes consumed in Massachusetts were originally purchased outside of the Commonwealth. The Bay State ranked 19th in terms of the percentage of cigarettes smuggled into the state in 2011, jumping up 13 spots from 32nd place in the center's 2009 rankings, thanks in large part, the report's authors Michael D. LaFaive and Todd Nesbit argue, to the $1 per pack cigarette tax increase that bumped excise up to $2.51 per pack.

"Massachusetts is going to see its rate of bootlegging go up from 18 to probably 35 percent. It's not unlikely at all," said Patrick Fleenor, chief economist at Fiscal Economics Inc., an economic consulting firm, who has written about the black market for cigarettes in the Bay State and elsewhere in the country.

Bay State Cigarette Sales On The Wane

State excise tax revenue from cigarettes increased an average of 5.9 percent annually from FY1992 to 2011, and the Commonwealth brought in $557 million in excise tax revenue in FY2011, according to data from the Massachusetts Department of Revenue. Since the excise tax was increased to $2.51 per pack during FY2009, the excise tax revenue has trailed down slightly, from $563 million in FY2009 to $562 million in FY2010 and $557 million in FY2011. Meanwhile, the number of packs of cigarettes sold in the state decreased 59 percent during the same period, from 547 million in FY1992 to 224 million in FY2011.

In order to estimate how many of the cigarettes smokers consume originate outside their home state, Mackinac matched each state's actual legal sales to its predicted statewide consumption based on reported smoking rates. The difference between those two numbers is the estimated smuggling rate, and the illicit trade can move both ways.

According to Mackinac's estimates, New Hampshire is the biggest net "exporter" of cigarettes, with nearly 27 packs finding their way out of the Granite State for every 100 consumed there. The excise tax in New Hampshire is $1.78 per pack.

If Governor Patrick's proposed increase to the cigarette excise tax is approved, Massachusetts would have the highest excise in New England at $3.51 per pack.

"It's just an easy tax to hike in that the cigarette industry's been demonized for so long and politicians take advantage of that," said Fleenor.

"Smokers are an easy target. This is the first tax that's often raised. They're reluctant to fight back, they're not that well-organized."

The Trade-off of Tax Hikes

Rhode Island currently has the highest excise tax in the region at $3.50 per pack, as of July 1, 2012.

Several Ocean State lawmakers proposed a bill last year that would have decreased Rhode Island's cigarette excise tax by $1 per pack in order to make the state more competitive with neighboring Connecticut and Rhode Island. The bill's co-sponsors argued that the decrease to the excise tax would actually increase state revenues by encouraging the small state's residents to make their tobacco purchases within the borders rather than outside them.

If Massachusetts lawmakers approve Patrick's proposed hike to the cigarette excise tax, said Fleenor, the percentage of bootleg cigarettes compared to locally taxed cigarettes consumed within the state will increase dramatically.

"You'll see a big jump because you get the double effect," he said, noting that smokers from Rhode Island will no longer have an economic incentive to travel across the border to the Bay State, while those in Massachusetts will have even more reason to purchase cigarettes elsewhere.

"It's a strategy that's not going to work," Fleenor said, adding that state tax revenues will be the first to feel the hit, but ancillary issues surrounding the black market resale of cigarettes will be likely to increase as well.

As cigarette sales move from the corner store to the street corner, the ability to enforce regulations and restrict access become increasingly diminished.

"It's like traditional bootlegging of alcohol," said Fleenor. "It's like Prohibition, there's no way you can solve this problem through law enforcement, it's just too big."

"Cigarette tax hikes come with harsh and real unintended consequences," LaFaive and Nesbit wrote. "Before reaching deeper into smokersí pockets, state lawmakers should consider the deeper social costs of creating a lucrative black market for smuggled cigarettes." 


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