Cigarette Taxes and Cigarette Smuggling by State, 2024

Higher tax A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates incentivize tax avoidance. As tax rates increase, consumers and suppliers search for ways around these costs. In cigarette markets, consumers tend to shop across borders where the tax rates are lower, and dealers develop black and gray markets to sell illegally to consumers, paying little or no tax at all. Growing cigarette tax levels and differentials have made cigarette smuggling both a national problem and a lucrative criminal enterprise.

Each year, in partnership with scholars at the Mackinac Center for Public Policy, we estimate cigarette smuggling rates for each continental US state. The most recent report uses data from 2024. As in previous years, the data show a strong positive relationship between cigarette smuggling and tax rates across the country.

New York retook its usual status as the nationwide leader in cigarette smuggling after being surpassed briefly by California last year. A significant majority of cigarettes consumed in New York, an estimated 61.1 percent, weren't purchased legally in the state. California followed New York, with an estimated smuggling rate of 54.4 percent.

On the other end of the spectrum, net outbound smuggling rates-where cigarettes are purchased in the state and consumed elsewhere-were highest in Wyoming (58.6 percent) and Virginia (54.4 percent). Wyoming and Virginia are well-positioned to accept cross-border shoppers looking to avoid higher taxes in neighboring states and areas like Colorado and Washington,DC.

New York Leads Nation in Cigarette Smuggling

Smuggled Cigarettes Consumed as a Percentage of Total Cigarettes Consumed and Foregone Tax Revenue, 2024

Major Changes from 2023 Estimates

• New York became the most smuggled-into state with a smuggling rate of 61.1 percent, up from 51.8 percent the previous year. This coincided with an increase in the state's cigarette tax rate from $4.35 to $5.35 per pack.
• New Jersey was the largest mover, improving six places to 37^th in the nation as its rate of outbound smuggling increased from 2.5 percent to 13.3 percent. This coincided with the tax differential between New Jersey and New York increasing from $1.65 to $2.65 per pack, so cross-border shoppers avoided greater costs.

Cigarette smuggling is costly for states. We estimate that the forgone revenue from smuggled cigarettes totaled more than $4.6 billion in 2024. California lost nearly $1.4 billion in cigarette excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. collections, and New York missed out on more than $1.2 billion.

Virginia was the largest beneficiary of smuggling-related cigarette tax revenue, which nets the state more than $61 million. Indiana was the second largest, with net smuggling generating the Hoosier State nearly $57 million.

There is a strong positive relationship between cigarette smuggling and cigarette tax rates across the country. The data also show that when states increase their cigarette taxes, their smuggling rates also increase-just like New York this year-both in the form of increased purchases in neighboring states and through illicit international channels.

Cigarette smuggling clearly correlates with high cigarette taxes, but it also correlates with excessive regulations. Namely, states with menthol bans like California and Massachusetts also tend to have particularly high rates of smuggling as consumers shop across borders to avoid the ban.

Our previous analysis detailed the impact Massachusetts's flavor ban had on the state's tobacco revenue and smuggling. California's flavor ban continues to cost the state hundreds of millions of dollars annually as previously predicted, while smoking behavior in the state has remained largely unchanged. The void in legal sales continues to be filled by illicit products.

Evidence from flavor bans in states like Massachusetts and California indicates that, just as with alcohol prohibition in the 1920s, consumers can and will acquire prohibited products. While overall consumption remains steady, consumers are pushed to illicit markets that often have more dangerous products and prop up sophisticated organized criminal enterprises supplying their demand. Flavor bans, nicotine bans, or effective bans from FDA inaction all burden consumers, domestic legal businesses, and states that lose tax revenue and face higher enforcement costs.

While some states may benefit from cross-border trade, no state benefits from the illicit market of smuggled and counterfeit cigarettes. Many of these illicit cigarettes are smuggled from China, where an estimated 400 billion counterfeit cigarettes are produced annually. Counterfeit cigarettes are often more dangerous, containing toxic heavy metals and other contaminants. Some of the billions of dollars moved through cigarette smuggling internationally have been linked to terrorism.

State enforcement agencies bear additional burdens trying, and almost entirely failing, to combat these large-scale smuggling operations. Anti-smuggling task forces in various states seize hundreds of thousands of dollars' worth of contraband cigarettes. However, these seizures are often a minuscule amount of the overall market. A recent arrest and major seizure of approximately 43,700 packs of cigarettes by a multi-agency investigation in New York, for instance, represented 0.019 percent of estimated annual smuggling activity in the state.

Illicit markets for tax avoidance and smuggling are also becoming an increasingly prominent issue in the vaping market as well. Lawmakers could learn the lessons of cigarette taxation and prohibition and apply them to vaping regulation, but states are often falling into the same pitfalls that hurt revenues, legal businesses, and consumers.

Legal markets suffer when untaxed and unregulated products receive significant competitive advantages from high taxes and prohibitions. Illicit markets create additional dangers for consumers, and subsequently additional burdens on public health, and undermine both legitimate domestic businesses and state revenue generation.

Policymakers should consider the unintended, but foreseeable, consequences as they determine tax rates and regulatory regimes for tobacco and nicotine products.