High Tobacco Taxes Spark Huge Black Market in Northeast

High-cigarette tax jurisdictions are losing out on up to $729 million in tax revenue each year due to illicit trade in tobacco products.

That is according to a new study from the nonprofit research organization RTI International. The figure represents an upper-end estimate of aggregate revenue foregone by the cities of Boston, Philadelphia, New York, Providence and Washington, DC. All five are top destinations for cigarette smugglers seeking to take advantage of high cigarette tax rates that push economy-minded buyers, including underage smokers seeking to avoid high, legal prices, to the black market.

In New York, which boasts the highest cigarette tax in the nation, the market in illicit cigarettes is vast. 

According to a 2013 study by the Tax Foundation, about 60 percent of cigarettes sold in New York are smuggled. 

A previous 2011 study conducted by the lead researcher in the RTI study indicated that in New York City, specifically, up to 42 percent of cigarettes were smuggled into the city from lower tax jurisdictions. 

Most cigarettes sold on the black market in New York appear to originate from lower-tax Virginia. 

Late last year, New York City established by law a minimum price of $10.50 per pack, which some observers believe could further fuel the illicit trade problem. At the time of the study the average price per pack in New York City was about $8.

While some policy experts recommend standardizing cigarette taxes as a way of disincentivizing illicit, cross-border trade, the study in fact recommends implementation of a national “track-and-trace” system. That would enable police and federal authorities to track individual cigarette packages, and shut down smuggling rings. Such a system is authorized by 2009 legislation passed by Congress, but has not been pursued.

Another option would be to cut cigarette taxes in high-tax jurisdictions. Proposals that would achieve this have been introduced in prior legislative sessions in Rhode Island, but never implemented in the five jurisdictions that were the focus of the RTI International study.