The Illegal Cigarette Trade

Keith Humphreys worries that high cigarette taxes encourage black markets and drug-war excesses:

In New York City, a legal, fully taxed pack of cigarettes costs $10-15; Chicago prices are only slightly less. Working class and poor addicted smokers (i.e., most smokers) thus face great temptation to enter into the black market. Columbia University Professor Shelley Cantrell documented that “the $5 man” – a street seller of untaxed black market cigarettes – is now a pervasive feature of life in low-income New York City neighborhoods.

He thinks the federal government should push states to adopt moderate cigarette taxes:

If one imagined for the sake of argument that [a tax of] $1.50-$2.50 a pack were the initial chosen range for receiving federal tax largesse, that would give the 28 states below that range an incentive to hike state taxes. Citizens in those states would smoke substantially less, improving public health and more fully reimbursing the public purse for the costs of smoking. And out-of-state gangs of tobacco smugglers would have far less incentive to maintain a presence in the state. High-tax states (e.g., Washington, New York, New Jersey) would reap little net revenue from that part of their tax which was over $2.50 a pack because of the loss of the federal tax rebate. This would give them an incentive to stop further increases or even cut back. This could have the lamentable effect of reducing the frequency of price-driven smoking cessation, but those same states would benefit in terms of shrinking black markets.