By Elizabeth Stelle
and Michael LaFaive
New York license plates are a common sight in Pennsylvania's Pike County. For years, Empire State smokers have flocked south to escape high cigarette taxes. Unfortunately, hiking the commonwealth's cigarette tax would drive these customers away from Pennsylvania retailers and toward illegal, smuggled smokes - while delivering few public health benefits.
Gov. Wolf recently dropped his plan to increase the tax by $1 per pack - or more than 62 percent - but efforts to raise the tax continue, as calls for a staggering $1.60-per-pack hike demonstrate.
This is simply bad policy.
Just two years ago, Pennsylvania enjoyed a net cigarette smuggling rate of nearly zero, according to a statistical model designed by Michigan's Mackinac Center for Public Policy. That's the good news.
The bad news is that significant illegal cigarette trafficking already exists in Pennsylvania. In fact, more than 14 percent of all cigarettes consumed in the Keystone State in 2013 arrived via "commercial" smuggling - that is, illegal, long-haul, large shipments.
These illegal cigarette imports were offset by "exports," as individuals from states like New York came to Pennsylvania to buy cigarettes for personal use elsewhere. Such exports made up 12.6 percent of all cigarettes purchased in the state. Helping this exodus was the fact that New York tolerates a modicum of cross-border shopping for cigarettes, so not every border crossing is deemed illegal.
Unfortunately, raising the state excise tax by 62.4 percent - or more - would spike smuggling rates from zero to 20.3 percent, according to Mackinac's model. In other words, approximately one of every five cigarettes consumed in the commonwealth would be illicit. Not surprisingly, the overwhelming majority of these cigarettes would come from distant, low-tax states like Virginia and the Carolinas.
Philadelphia cigarette retailers are hardly surprised by this. After the city instituted a $1.60-per-pack tax increase last October, sending pack prices soaring into the $8 to $9 range, retailers saw their sales plummet by as much as 15 percent.
And it's not just businesses that would lose due to a statewide cigarette-tax increase. The Mackinac model estimates that Pennsylvania earned $136 million in 2013 cigarette-tax revenue from non-Pennsylvanians crossing the border from other states to buy personal smokes. If a $1-per-pack tax increase becomes reality, this revenue would drop to just $32 million, meaning a shift in the cigarette excise-tax burden from out-of-state smokers to in-state smokers.
Dollars and cents aside, do projected health benefits make a cigarette tax worthwhile?
The trade-off between cigarette taxes and health benefits is not so clear. All too often, politicians confuse declines in legal sales of cigarettes with people quitting, but it's not that simple. In fact, plenty of scholarly, peer-reviewed journal studies suggest that many smokers continue smoking despite higher costs, but they turn to purchasing cigarettes illicitly.
In an oft-cited 2005 work, economist Mark Stehr estimates that up to 85 percent of the changes in legal sales are attributable to tax evasion or avoidance, not to individuals quitting.
What's more, because cigarette smuggling has been shown to fund terrorism, drug bosses, and organized crime syndicates, the expected spike in the illegal activity could very well create more violence, requiring additional law enforcement resources.
The proposed tax increase on cigarettes may be well-intentioned, but it's misguided. A tax hike of this magnitude would only hurt small-business owners, increase lawlessness, and shift the tax burden from out-of-state shoppers to lower-income, in-state taxpayers. And all this would come with little to no net positive impact on the health of Pennsylvania citizens.