This article first appeared at JBartlett.org.
New Hampshire is the No. 3 state in the country for outbound cigarette smuggling, resulting in a revenue windfall, concludes the latest annual report on interstate cigarette smuggling from the Tax Foundation and Mackinac Center for Public Policy.
From 2007-2022, New Hampshire earned $955 million in state revenue from cigarette buyers who then smuggled their purchases to higher-tax states, according to the report.
(At $1.78 per pack, New Hampshire has the lowest tobacco tax rate north of Virginia.)
The study’s data, from 2022, “demonstrate that when states increase their cigarette taxes, smuggling rates increase, both in the form of increased purchases in neighboring states and through illicit international channels,” the report concludes.
“Higher tax rates incentivize smuggling. As tax rates increase, consumers and suppliers search for ways around these costs. In cigarette markets, consumers tend to shop across borders where the tax rates are lower and dealers develop black and gray markets to sell illegally to consumers, paying little or no tax at all. Growing cigarette tax levels and differentials have made cigarette smuggling both a national problem and a lucrative criminal enterprise,” the report states.
“A primary driver of the amount of cigarette smuggling is the relative magnitude of that state’s excise tax compared to the rate imposed by surrounding states or foreign countries. A sizable literature of peer-reviewed academic studies supports these observations.[11] A 2017 study published in Public Finance Reviewprovides the academic theory and estimates for how tax rates affect smuggling, highlighting that easily transportable goods (e.g., cigarettes) will be attractive cross-border shopping items.[12] A 2018 study published in the same journal supported those findings by examining littered packs of cigarettes across 132 communities in 38 states, finding that 21 percent of packs did not have proper local stamps.[13]”
In addition to high taxes, the study found that bans on flavored cigarettes in Massachusetts and California have sent smuggling to new heights.
Massachusetts’ ban on flavored tobacco and vaping products moved it up to the No. 3 destination in the country for smuggled cigarettes and helped make New Hampshire the No. 3 state for outbound smuggling.
“The first state to implement a statewide menthol flavor ban was Massachusetts. Its menthol flavor ban took effect in June 2020. In the 12 months following implementation, sales in the Bay State declined by almost 24 percent compared to the 12 months preceding the ban. Through the end of 2021, sales were down more than 25 percent compared to sales from 2019. This decline translates to $135 million less in cigarette tax revenue for Massachusetts (not including lost revenue from sales tax and smokeless tobacco sales).
“Importantly, these sales did not disappear; most of the transactions merely moved to neighboring states or to illicit markets. Throughout most of the US and all the New England states, cigarette sales have constantly declined since the 1960s. It was telling when sales of cigarettes in New Hampshire increased by 22 percent and sales in Rhode Island increased by 18 percent in the 12 months following the Massachusetts menthol ban. Sales in New Hampshire and Rhode Island remain roughly 10 percent higher in 2021 than in 2019 thanks to cross-border Massachusetts shoppers and smugglers.
“Smuggling skyrocketed in Massachusetts. In 2019, prior to the flavor ban, Massachusetts had a net inbound smuggling rate of 19.9 percent, the 12th-highest in the country. The nearly 38 million packs smuggled into the state cost the state more than $133 million per year in forgone revenue.
“A full year after the ban in 2021, smuggling in Massachusetts is up to 37.6 percent, the fourth-highest rate in the country. The 64 million packs smuggled into the state now cost the state $224 million in forgone revenue each year.”
The State of New Hampshire earned $26 million in revenue from cigarette smugglers in 2022, and a total of $955 million from 2007-2022, the report concluded.
Massachusetts’ revenue losses are nearly nine times larger than New Hampshire’s revenue gains.
“In 2019, prior to the flavor ban, Massachusetts had a net inbound smuggling rate of 19.9 percent, the 12th-highest in the country,” the report found. “The nearly 38 million packs smuggled into the state cost the state more than $133 million per year in forgone revenue.
“A full year after the ban in 2021, smuggling in Massachusetts is up to 37.6 percent, the fourth-highest rate in the country. The 64 million packs smuggled into the state now cost the state $224 million in forgone revenue each year.”
The ban has also saddled Massachusetts with enforcement costs.
“Massachusetts has established a dedicated Multi-Agency Illegal Tobacco Task Force, which seized a record-high 18,483 packs of cigarettes in 2022,” the report notes. “This, too, falls dramatically short of the more than 67 million packs smuggled into the state—amounting to 0.027 percent of illegal cigarettes. The scope of the task force also extends to other types of tobacco and vapor devices on a budget of more than $1 million in 2022.”
In addition to creating a market for the smuggling of legal cigarettes domestically, high taxes and flavor bans have created a booming market for illegal, unregulated imports, the report noted, something that has been documented in other studies as well.
In the past, some New Hampshire office-holders have cited cigarette and alcohol smuggling as a reason to raise excise taxes to match those of neighboring states. But this gets the causation backwards.
New Hampshire has always maintained low rates relative to its neighbors. The other Northeastern states created the regional black market by dramatically raising their rates, and in the case of Massachusetts banning menthols.
New Hampshire has been the beneficiary of interstate smuggling, but it was not the cause.
