Letter: Tax hike will boost smuggled smokes

I read with interest your editorial citing cigarette consumption drop figures in Indiana [“Editorial: Drop in tobacco use statewide signals tax hike is having an effect,” Nov. 28].

Specifically, you wrote: “The Health Department used the State Budget Agency’s reports about tax receipts to calculate the drop in consumption. We’re a bit cautious about the efficacy of that approach, given that it’s likely at least some smokers in neighboring states probably came to Indiana to buy cheaper cigarettes, an advantage that disappeared with the higher tax.”

It’s good to be cautious. My research, along with professor Todd Nesbit of Ball State University, demonstrates that Indiana will go from a net exporter of smuggled smokes to a net importer of them. Our statistical model predicts that going forward about 15% of total cigarette consumption in Indiana will be a function of tax evasion and avoidance.

A decline in legal paid sales does not equal a decline in consumption. A more likely explanation is that most consumers are now getting their cigarettes from a lower-tax jurisdiction.

Professor Nesbit and I published a piece about Indiana’s cigarette excise tax in June and the likely smuggling impacts from it. Indiana last raised its cigarette tax in July 2007, from 55 cents to 99.5 cents per pack. For our 2008 study, we obtained the sales data of a large Midwestern cigarette distributor. These data, which let us track activity by ZIP code, allowed us to measure sales from wholesalers to retailers in counties that touched each other along the Indiana-Michigan border.

We found that in the three months leading up to and the three months following Indiana’s last tax hike, sales to Michigan retailers in border counties rose more than 50% as buyers stocked up on cigarettes in preparation of changes that will give Michiganders less incentive to cross the state line into Indiana to save on their smokes. With the tax now at $3 per pack, it’s a near certainty that Indiana consumers will travel to Kentucky, Ohio and Michigan to buy cheaper cigarettes.•

__________

—Michael LaFaive
senior director, Morey Fiscal Policy Initiative, Mackinac Center for Public Policy