No, Hiking Taxes Isn't the Magic Solution to Smoking

During my appearance earlier on
the
Thom Hartmann show, Hartmann emphasized cigarette taxes as a
means of offsetting the “externalities” in terms of lost
productivity and health costs caused by tobacco consumption. “Lots
of lifestyle choices cause externalities,” I told him. “But if you
show up to work with a hangover, your employer suffers the lost
productivity, but the government gets the taxes.” Measuring costs
and benefits and offsetting costs with taxes might work as a
classroom exercise, but it’s a non-starter in a world where costs
(and subjective benefits, such as pleasure) are distributed all
over the place and we don’t all (yet) work for the government.
That’s probably why most cigarette tax advocates stick with a
simple social-engineering argument for discouraging tobacco use by
hiking the cost through the roof with taxes. But even they can’t
explain how tobacco is going to be the one popular good or service
ever discovered that doesn’t breed a massive black market when
larded with high taxes and tight regulations.

The socially molding possibilities of taxes came up again,
recently, in an article in the
New England Journal of Medicine that called for
tripling the government’s take on cigarettes around the world. The
authors, Prabhat Jha, M.D., D.Phil., and Richard Peto, F.R.S.,
write:

Tripling inflation-adjusted specific excise taxes on tobacco
would, in many low- and middle-income countries, approximately
double the average price of cigarettes (and more than double prices
of cheaper brands), which would reduce consumption by about a third
and actually increase tobacco revenues by about a third. In
countries in which the government owns most of the industry, as in
China, the distinction between taxes and profit is fairly
arbitrary, but doubling the average prices would still
substantially reduce consumption and increase revenue.

But this isn’t a hypothetical policy proposal. We already know,
because it’s been done, that hiking cigarette taxes breeds black
markets in smuggled and counterfeited (illegally produced knock-off
cigarettes sold under phony labels) smokes. New York has the
highest cigarette taxes in the country, at $4.35 per pack, plus
another $1.50 levied in New York City. The
result is that 60.9 percent of cigarettes sold in the state are
black market, according to the Mackinac Center for Public
Policy. Washington state has high cigarette taxes, relative to
its neighbors, and a
massive smuggling problem (48.5 percent of the state’s
cigarettes come from the black market).

You could, I suppose, impose globally uniform taxes to
discourage the easy sort of smuggling from low-cost jurisdictions
to high-cost ones. But that would just create an incentive for
illegally produced cigarettes, just as black markets supply
cocaine, heroin, and marijuana where they’re completely banned.

How do the authors address this problem? In one paragraph.

Smuggling is a concern when tobacco taxes rise; about 10% of all
cigarettes manufactured worldwide are already untaxed. Use of
specific excise taxes on tobacco (rather than ad valorem taxes),
stronger tax administration, and practicable controls on organized
smuggling can, however, limit the problem. Even with some
smuggling, large tax increases can substantially reduce consumption
and increase revenue (Figure 4), especially if supported by better
tax enforcement.

The solutions are “stronger tax administration” and “practicable
controls on organized smuggling”? Really? It’s a shame nobody ever
thought of that before through all the efforts to suppress black
markets throughout history.

Well…Maybe black markets are just an externality that can be
offset by a wee bit more tax.