Despite cigarettes being legal, there is still a black market for them, especially in areas with high cigarette taxes.
Michigan’s tax on cigarettes in 2017, the most recent tax data available, is $2 per pack. According to the Tax Foundation, nearly 21 percent of all cigarettes smoked in Michigan have been smuggled in.
Studies from the Mackinac Center for Public Policy indicate that there is a strong link between the cigarette tax and smuggling rates. The Center is a nonprofit research and educational institute that advances the principles of free markets and limited government.
Cities where cigarette taxes are higher experience more instances of smuggling. Cigarettes are purchased in areas with lower cigarette taxes and then sold in neighboring areas where the tax is higher.
New York has the highest rate of cigarettes being smuggled in. New Yorkers pay $4.35 in tax for each pack of cigarettes, putting the state at the highest tax rate in the country. Smuggled cigarettes accounted for over 55 percent of the total amount of cigarettes smoked in New York in 2017.
There are two types of smuggling: commercial and casual. Commercial smuggling involves large amounts of cigarettes that could be counterfeits of real brands, from hijacked trucks or the result of officials turning a blind eye to smuggling activities. Casual smuggling involves smaller quantities that are purchased in one place and transported to another for personal use.
The Mackinac Center advises that any state considering raising its cigarette excise taxes should be acutely aware of the myriad unintended consequences and the unreliable revenue stream these taxes provide.