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High Cigarette Taxes Turn Smokers Into Smugglers

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The conclusion from a recently released report on cigarette taxes and cigarette smuggling from the Tax Foundation may sound obvious. The Washington, D.C.-based think tank found that when states impose high excise taxes on cigarettes, smokers tend to avoid buying cigarettes there. Instead, they buy them in low-tax states -- smuggling their smoky contraband across state lines.

No shocker there, right? However, what may surprise you is the foundation's revelation of the size of the phenomenon.

The States That Bum the Most Out-of-State Smokes

At $4.35 a pack, New York levies the highest excise tax on cigarettes in the land. It has nearly tripled the size of its excise since 2006 and now boasts an excise tax almost precisely three times the national average ($1.46 a pack).

The result: the majority of cigarettes smoked in New York are contraband. According to the study's data (which goes through 2012, the most recent year for which complete data are available), 56.9 percent of New York's cigarettes were smuggled into the state, dodging New York excise taxes.

A majority of smokes are smuggled in Arizona as well (51.5 percent), and New Mexico and Washington state (which tax smokes at $1.66 and $3.025 a pack, respectively) are not far behind. And they may not be alone.

The study shows that smuggled smokes make up 25 percent or more of cigarettes consumed in 12 states. And with the foundation reporting that 30 states, plus the District of Columbia, increased cigarette taxes between 2006 and 2012, the trend is moving toward higher cigarette taxes -- and more cigarette smuggling into states doing more of the taxing.

Smuggled From Where?

So where are all these contraband smokes coming from? In the United States, roughly 15 billion packs of cigarettes are sold each year. Some come from international globetrotters arriving in-state via duty free. As for the rest, the six biggest supplier states for cigarettes (the places where smugglers buy their contraband smokes before taking them back home) appear to be:
  • New Hampshire -- 24.2 percent
  • Wyoming -- 22.3 percent
  • Idaho -- 21.3 percent
  • Virginia -- 21.1 percent
  • Delaware -- 20.9 percent
  • West Virginia -- 20.6 percent
In these six states, at least 1 in 5 cigarettes sold in the state isn't consumed there -- so these places are where the cigarettes are coming from. (Note that Altria's (MO) headquarters lie in Virginia. North Carolina, which is home to twin tobacco heavyweights Lorillard (LO) and Reynolds American (RAI), may also be a prime source for smokes -- but the foundation didn't provide full data on the state in its study, so it's hard to say for sure. Other jurisdictions with incomplete data are Alaska, Hawaii and the District of Columbia.)

Curiously, while cigarette excise taxes are pretty low in four of these six states, in two of them -- Delaware and New Hampshire -- the respective per pack excise taxes of $1.60 and $1.78 are a bit higher than the national average of $1.46.

The attraction of smuggling cigarettes bought in these states can be explained by geography. Delaware is surrounded by tax-crazy states Maryland, Pennsylvania and New Jersey. New Hampshire abuts even higher-above-average taxers Vermont, Maine and Massachusetts.

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.​


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