Butt-legging Soars

 Alexander Hamilton wrote in Federalist 21:

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. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

A release from Rutgers University:

New York City has the highest cigarette taxes in the nation, but Rutgers Health research indicates that many smokers illegally avoid them.

Most cigarette packs littered on city streets came from out-of-state sources or bore no tax stamps, according to a study that suggests widespread evasion of the city's steep tobacco taxes.

Researchers who collected 252 discarded cigarette packs from across the city's five boroughs found that only 16.6% bore the proper New York City tax stamp, down from 39.3% in 2011 and 23.7% in 2015 when other teams conducted the same experiment.

The findings, published in Tobacco Control, based on systematic collection from 30 census tracts in February 2024, offer a unique window into consumption patterns by using litter as a proxy for where smokers obtain cigarettes.

“It’s arbitrage,” said Kevin Schroth, a researcher at Rutgers Institute for Nicotine and Tobacco Studies and lead author of the study. “If something is cheaper in one place and more expensive in another, people will find ways to profit by purchasing in the cheap place and selling in the expensive one. And because we can compare our findings to prior work, we can see that it may be a growing problem for New York City’s tax collection. What’s interesting, though, is that despite this trend, New York City’s smoking rates are still declining. This might mean that part of a shrinking smoking population is very determined to get cheap, untaxed cigarettes.”

The research revealed a notable geographic shift in cigarette trafficking patterns. Georgia emerged as the primary source of illicit cigarettes, accounting for 27.8% of the littered packs and surpassing Virginia’s 20.6%. Packs with no tax stamps (which likely come from North Carolina or Indian reservations) comprised 20.2% of the sample, nearly doubling from 12.1% in 2015.

The study also highlighted the outsized role of Newport, a menthol brand that made up 43.3% of all collected packs. Some 89.9% of Newport packs lacked New York City tax stamps. This high percentage of menthol packs raises issues about smuggling’s impact on health equity, the researchers said. Menthol use is far higher among Black and Latino smokers than white smokers, and cheaper illicit menthols may make it more difficult for people to quit.

With state and city taxes totaling $6.85 per pack plus a $1.01 federal tax, cigarettes sold legally in New York City are among the highest taxes in the nation. By contrast, cigarettes face 37 cents in taxes in Georgia and 60 cents in Virginia, allowing smugglers and their customers to split more than $6 in tax savings on every pack. (New Jersey’s tax of $3 per pack might make it a destination for individual city smokers who want to save money without going far, but it appears to be too high for smugglers.) North Carolina imposes a 45-cent tax and does not require tax stamps. Indian reservations do not impose taxes or require stamps.

Schroth, who previously worked with the New York City Health Department on cigarette tax enforcement, described a retail system where legitimate and illicit cigarettes operate side by side. Some store owners hide untaxed cigarettes in secret compartments beneath counters or above drop ceilings, he said, while customers use code phrases like "special price" to signal their interest in tax-free products.

Local agencies conduct store sweeps, but cracking a supply chain that stretches down Interstate 95 is difficult.

Schroth said the most promising fix lies upstream. He pointed to a federal “track and trace” system Congress authorized in 2009 that would assign unique identifiers to packs and record transfers from manufacturer to distributor to retailer.

“With track and trace, you could pick up a littered pack in New York and see that it moved through a specific warehouse and into a specific store in Georgia,” Schroth said. “That lets you focus enforcement on the points feeding the illicit market. It could also reveal sources of unstamped packs. The FDA would have to follow its rule-making process to execute this Congressional mandate.”

The persistence of illicit trade creates a paradox for public health officials: While cigarette taxes are designed both to generate revenue and discourage smoking, the study's findings suggest they are high enough that a significant portion of the city's estimated 565,000 adult smokers may be circumventing the price increases meant to push them toward quitting.

Still, smoking rates in New York City have continued to decline even as tax evasion appears to have increased. Adult smoking fell from 14.3% in 2015 to 9.7% in 2022, below both the national average of 11.6% and the rest of New York State at 12.3%.

The researchers acknowledged limitations in their methodology, noting uncertainty about whether people who litter cigarette packs are more likely to buy smuggled cigarettes than others. However, they argued that comparing litter samples over time using identical methods provides valuable insights into changing patterns of tax compliance. rule-making

Smoking Is Down

 Jeffrey M. Jones at Gallup:

As the percentage of U.S. adults who smoke cigarettes has reached a new low of 11% this year, much of the decline is tied to sharply lower smoking rates among young adults. From 2001 to 2003, an average of 35% of U.S. adults between the ages of 18 and 29 said they smoked cigarettes, compared with 12% in the latest estimate.

This 23-percentage-point decline among young adults is more than double that of any other age group over that time. As a result of these changes, young adults have moved from the group most likely to smoke cigarettes to the second-least likely, with a rate higher than only the oldest Americans.

Inequality and Cancer

From the American Cancer Society:

The death rate from cancer in the US has declined steadily over the past 25 years, according to annual statistics reporting from the American Cancer Society. As of 2016, the cancer death rate for men and women combined had fallen 27% from its peak in 1991. This decline translates to about 1.5% per year and more than 2.6 million deaths avoided between 1991 and 2016.

The drop in cancer mortality is mostly due to steady reductions in smoking and advances in early detection and treatment. But not all populations are benefitting. Although the racial gap in cancer deaths is slowly narrowing, socioeconomic inequalities are widening. “Cancer Statistics, 2019,” published in the American Cancer Society’s journal CA: A Cancer Journal for Clinicians, estimates the numbers of new cancer cases and deaths expected in the US this year. The estimates are some of the most widely quoted cancer statistics in the world. The information is also released in a companion report, Cancer Facts and Figures 2019, available on the interactive website, the Cancer Statistics Center.
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The rates of new cancer cases and cancer deaths vary quite a bit among racial and ethnic groups, with rates generally highest among African Americans and lowest for Asian Americans. The cancer death rate in 2016 was 14% higher in blacks than in whites. That gap has narrowed from a peak of 33% in 1993. The progress is due to the steep drop in smoking rates among black teens from the late 1970s through the early 1990s.

Racial and ethnic differences in cancer burden reflect several factors related to socioeconomic status. People living in the poorest counties in the US are more likely to smoke and be obese. During 2012-2016, death rates in the poorest counties were 2 times higher for cervical cancer and 40% higher for male lung and liver cancers, compared with the richest counties. Poverty is also associated with lower rates of routine cancer screening, later stage at diagnosis, and a lower likelihood of getting the best treatment.

Sin Taxes: Hamilton was Right

In Federalist 21, Alexander Hamilton explained:

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.

Roger Bate at AEI:

Today my colleagues Aparna Mathur, Cody Kallen, and I published a working paper on illicit tobacco. We hope it is the first paper in a series on changes in the tobacco market.

As authorities around the world have increased taxes on tobacco products in order to reduce smoking, illicit (untaxed) tobacco use has increased. Organized criminals have moved from smuggling brands into making their own products, known as illicit whites.

They make them legally in jurisdictions like Dubai or Paraguay and then smuggle them into markets where they have paid no tax, and may not contain any of the important warning labels. Some of the criminal groups behind illicit tobacco are implicated in terror financing as well.

We conducted a variety of empirical studies on availability of illicit whites, the legality of discarded packs, and smoker attitudes toward illicit products. We found that tax rates drive the illicit market, that smokers are annoyed by high taxes, and a minority are happy to buy illicit products.

Yet policymakers ignore these realities. New York is raising cigarette taxes to curb smoking, ignoring the rise of illicit tobacco.

What is unknown is whether smoking rates among those happy to buy illicit products are increasing since prices are far lower, whether the authorities, including the World Health Organization, can do anything about the rise in illicit products, and whether excess tax rates will undermine the conversion from smoking to far less harmful vaping.

Big Tobacco Airs Misleading Ads

Tobacco companies are trying to beat a California ballot measure hiking cigarette taxes.  PolitiFact reports that their ads are misleading.

The No on 56 campaign is running ads that say the proposed tobacco tax "cheats schools out of at least $600 million a year."

The measure includes an exemption from the state’s school funding guarantee. A portion of its revenues, estimated at up to $1.4 billion, could otherwise have been directed toward school funding.

But past tobacco taxes and a tax to fund mental health services have also legally avoided this guarantee. Those had exemptions allowing their revenues to fund health services.

This doesn't mean, however, that money will be taken from schools or community colleges under Prop 56. The measure, in fact, sends about $20 million to schools for tobacco prevention programs.

The claim that Prop 56 "cheats" schools goes too far. It might have been accurate to say the measure exempts most all revenue from going to schools.

But the term chosen by No on 56 is misleading.

We rate the claim Mostly False.

Hastert

Jonathan Weisman reports at The New York Times:

J. Dennis Hastert, the longest-serving Republican House speaker in history, was swept from leadership in 2006 on a wave of Republican revulsion over what critics saw as a legislative favor factory he presided over in Congress. That wave deposited him on K Street, a prime address for the capital’s lobbyists, where his influence and good name kept the favors flowing — including into his bank accounts.

Federal law enforcement agents say Mr. Hastert’s years as a lobbyist and rainmaker explain how he was able to promise $3.5 million in cash to a former student who claims Mr. Hastert sexually molested him decades ago.

A former wrestling coach and high school teacher, Mr. Hastert did not enter Congress as wealthy as some of his colleagues. Yet he was still able to amass a small fortune with land deals, one aided by an earmark he secured for a highway interchange.

But it was at his own post-Congress lobbying firm and at the professional services firm Dickstein Shapiro that Mr. Hastert swelled his cash flow, working all sides of issues and glad-handing members of Congress for controversial clients.

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From 2011 to 2014, Lorillard Tobacco paid Dickstein Shapiro nearly $8 million to lobby for the benefit of candy-flavored tobacco and electronic cigarettes, and Mr. Hastert was the most prominent member of the lobbying team.

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The Center for Responsive Politics, a watchdog group, labeled Mr. Hastert “the eclectic lobbyist.”

Last year, Jessica Brown and colleagues wrote at The New England Journal of Medicine:

Flavored tobacco products are marketed worldwide (see the Supplementary Appendix, available with the full text of this letter at NEJM.org). A 2007 World Health Organization (WHO) report1states, “In view of the little research that has been conducted on flavoured tobacco, the WHO Study Group on Tobacco Product Regulation . . . urges health authorities to consider public health initiatives to reduce the marketing and use of flavoured tobacco products.”

In the United States, the Food and Drug Administration reports, “Almost 90 percent of adult smokers start smoking as teenagers. . . . flavored cigarettes are a gateway for many children and young adults to become regular smokers.”2

Bodegas and Butt-legging

In Federalist 21, Alexander Hamilton explained:

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.

Michael Wilson reports at The New York Times:

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.

Butt-legging

In our chapters on federalism and economic policy, we discuss "butt-legging," the practice of buying cigarettes in low-tax states and illegally reselling them in high-tax states. CBS reports:

Several months ago, the Government Accountability Office reported:

Tobacco products face varying levels of taxation in different locations, creating opportunities and incentives for illicit trade. Cigarettes are taxed at the federal, state, and in some cases, local levels. According to industry representatives, taxes and other fees make up significant components of the final price of cigarettes, averaging 53 percent of the retail price. While the national average retail price of a pack of cigarettes was $5.95 in 2010, in New York City, a pack can cost up to $13.00 or more due to high combined state and city taxes. In contrast, a pack of cigarettes in Richmond, Virginia, can cost approximately $5.00, due to low state cigarette taxes there. The tax differential between a case of cigarettes (typically containing 12,000 cigarettes) in New York City and Richmond is over $3,000, creating incentives for illicit trade and profits. Excise taxes and other fees on tobacco products can be evaded at numerous points in the supply chain. Law enforcement officials told us another incentive to engage in this activity is the fact illicit tobacco penalties are comparatively less severe than other forms of illicit trade. According to experts we spoke with and literature we reviewed, a wide range of schemes are used by different actors to profit from illicit trade in tobacco products, mainly through the evasion of taxes. Schemes can range from individual consumers purchasing tax-free cigarettes from Internet Web sites, to larger-scale interstate trafficking of tobacco products, to smuggling cigarettes into the country by criminal organizations.

Also see a Justice Department report on the topic.