Increased Taxes = Increased Crime

Loren Kaye
President of the California Foundation for Commerce and Education

Tax increases have many intended effects, such as raising revenues and changing behavior. They also have anticipated but unfortunate effects, such as dampening growth or harming groups of taxpayers.

But a tax hike that increases crime – who would ever tolerate that?

It turns out, the Legislature is considering just such a scheme. A bill by Senator Kevin de León that would add two dollars to the tobacco tax would also result in doubling the current cigarette smuggling rate to an astonishing 39 percent of total cigarettes consumed. This would leave California with the third highest smuggling rate in the United States, behind New York and Washington, D.C.

These new findings are revealed in a report just issued by the California Foundation for Commerce and Education (disclosure: that’s my employer). Authored by the consulting firm Andrew Chang, LLC, The State and Local Impact of Tobacco Prices on Smuggling and Black Market Tobacco Sales made these important findings:

  • Approximately one out of every five cigarettes in California is smuggled, as of 2011. This amounts to about 220 million cigarettes smuggled every year, the equivalent of Arizona’s total cigarette consumption.
  • A $2 dollar-a-pack tax increase, to a total of $8, would double the smuggling rate to 39 percent of all cigarettes consumed.
  • By failing to account for smuggling, proponents for the tax hike overestimate the tax on tobacco products by some $500 million annually.
  • The tax increase and drop in legitimate sales attributed to smuggling would result in 11,000 fewer retail jobs in the state.
  • Though tobacco smuggling would increase throughout the state, the burden of increased crime would fall on Los Angeles County and the Bay Area.

Chang also concluded that the literature suggests a $2 increase in the excise tax may create further unintended consequences of increasing organized crime in California.

Smuggling takes many forms, from individual purchases brought home from out-of-state or from Native American reservations, purchases on the internet, as well as black market sales from unscrupulous retailers or street criminals. National surveys demonstrate that low tobacco tax states are net exporters of black market smokes, while high tax states import untaxed cigarettes.

Debating the level of taxation on tobacco – and the use of the new revenues – is an evergreen subject in Sacramento. This new information should be put to use in judging whether the alleged benefits of higher taxes are worth the costs of more crime.

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