In Federalist 21, Alexander Hamilton explained:Michael Wilson reports at The New York Times:
It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, "in political arithmetic, two and two do not always make four." If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds.
A pack of Marlboros purchased at Virginia’s low prices and sold at New York City’s going rate can put five or six dollars in the seller’s pocket. These smuggled cigarettes are not hard to find — the city’s Department of Finance said inspections yielded these cigarettes in 48 percent of bodegas visited in recent inspections. They are tucked away in compartments and camouflaged with fake tax stamps.
In early 2002, the city, the state and the federal government collected a combined $15.80 in taxes on every carton of cigarettes sold here. Today, that number is $68.60, or almost $7 a pack. With the increases in taxes, more packs flowed up from the South, in cars and overstuffed minivans and in the underside luggage compartments of passenger buses, said Maureen Kokeas, director of the office of tax enforcement for the city’s Department of Finance. The cigarettes are kept in storage units and quietly sold, a carton or three at a time, to bodegas.
A bodega owner caught last week with 10 cartons of smuggled Marlboros and Newports explained the math. He had bought them the day before from a man he did not know. “He charged me $65 a carton,” he told deputies. That is far cheaper than cartons bought or sold in New York. He shook his head in despair as the deputies took the cigarettes away, his $650 cash investment headed to an incinerator on Long Island, up in smoke.