From: The Tax Foundation
Hearing on Tobacco: Taxes Owed, Avoided, and Evaded Before the U.S. Senate Committee on Finance
Chairman Wyden, Ranking Member Hatch, and members of the Committee:
I appreciate the opportunity to submit this statement on tobacco taxes and their impact across the country. In the 77 years since our founding in 1937, the Tax Foundation has monitored tax policy trends at the federal and state levels, and our data and research are heavily relied upon by policymakers, the media, and the general public. Our analysis is guided by the idea that taxes should be as simple, neutral, transparent, and stable as possible, and as a 501(c)(3) nonprofit, nonpartisan organization, we take no position on any pending legislation.
We hope that the material we provide will be helpful in the Committee’s consideration of the issue.
Executive Summary
- Tobacco taxes are the highest they have ever been in the United States. The federal rate currently stands at $1.0066 per pack of cigarettes, and state and local rates add as much as an additional $6.16 per pack (as in Chicago, Illinois). These combined rates are equivalent to a tax in excess of 200 percent in some locales.
- The high tax burden on tobacco results in de facto prohibition of the products, bringing all the undesirable outcomes associated with alcohol prohibition in the 1920s. In our research we have found evidence of substantial tobacco smuggling from low to high tax jurisdictions, violent crime, theft of tobacco and tobacco tax stamps, corruption of law-enforcement officers, and even funding of terrorist organizations through crime rings.
- The Mackinac Center for Public Policy estimates that 56.9 percent of the cigarettes consumed in New York State in 2012 were smuggled into the state from other locales. Other states with substantial smuggling problems include Arizona (51.5 percent), New Mexico (48.1 percent), Washington (48.0 percent) and Wisconsin (34.6 percent).
- In addition to smuggling authentic cigarettes from low to high tax jurisdictions, criminals sometimes skirt the legal market altogether and counterfeit name brand products and state tobacco tax stamps. Cigarette counterfeiting is a highly profitable international business that exposes consumers to products with increased levels of dangerous chemicals like lead and thallium. Other sources report finding insect eggs, dead flies, mold, and human feces in counterfeit cigarettes. One source estimates that the Chinese cigarette counterfeiting business produces 400 billion cigarettes per year.
- In 1994, federal cigarette excise taxes in Canada were cut from $16 to $11 per carton because cigarette smuggling had grown so pervasive.
- The steady decline in tobacco consumption since the 1960s makes tobacco tax revenue an unstable revenue source. Administration plans to fund pre-kindergarten education with a federal cigarette tax increase are not sustainable in the long term, because revenues are projected to decline, while costs will grow.
