My first real job was at a consumer research company, calling people to survey their thoughts on various issues. One such issue was over cigarette taxes, and I recall one particular question about whether expensive cigarettes would reduce smoking or just lead to a “black market.” If it wasn’t the first time I had ever heard that term, it was surely the first time it stuck with me. Typically associated with criminal activity, black markets develop when demands for products and services cannot be met through regular economic means, due to high prices, illegality or some other barrier. It turns out that, indeed, rising taxes on cigarettes—like the one passed soon after Obama’s inauguration—have created a booming black market for cigarette smuggling.
This evening, the CNBC show Cigarette Wars included a segment on this new criminal industry. Gang rings—fighting one another for territory—are getting busted up, participating convenient stores are being shut down and their owners arrested, and millions of dollars of paraphernalia (in the form of, say, cartons of Marlboro Light) are being confiscated as federal government agents and local law enforcement officers crack down.
Maybe you’re asking yourself why all this is necessary, since cigarettes are perfectly legal. But smoking or selling is not the crime. In economics, there’s a word for buying in one place and selling in another at a higher cost: “arbitrage.” Smugglers are buying cheap cigarettes in low-tax states and delivering them to happy customers in high-tax states. But again, you might think, that’s a legal, and common, business strategy. I take advantage of it every time I go to a Texas grocery store and buy Florida oranges. But legislators decided it shouldn’t be legal in this case. Maybe they really hate smoking, but more likely, they don’t like people getting around their taxes.
As CNBC puts it, a “crime wave” of “black market profiteers [are] cheating the U.S. government out of $5 billion in cigarette tax dollars each year.” And that’s just from “illegitimate” sales—the government is getting much more than that from legal transactions. But I really have to stop here and ask, who is actually paying the price in this situation? Where do we, as consumers, employees and citizens, stand in this fight?
Under the current law, everyone pays except for the government. The consumer must either pay “as much as $14 per pack” or go without. The store owner loses business, and so does the manufacturer. As cutbacks follow, the people who work for the store owner and the manufacturer also lose. In fact, taxpayers who are funding the police actions toward busting this “crime” are also losing. But the government is the big winner, with billions added to its coffers from primarily low-income smokers.
“By trying to control supply and demand of a legal product, the government has actually created a whole new business opportunity for hard criminals and vulnerable kids on the streets, while loading down police officers with additional concerns.”
Actually, there is one more winner—the criminal community. By trying to control supply and demand of a legal product, the government has actually opened up a whole new business opportunity for hard criminals and vulnerable kids on the streets, while loading down police officers with additional concerns. We’ve seen the same things happen through the banning of prostitution, alcohol and illegal drugs. But at least those who support outlawing such activities argue that they cause sufficient societal harm. A cigarette, in comparison, is about as dangerous as a cheeseburger.
What’s irritating is how preventable this problem would have been if the lawmakers made any attempt to examine the economic incentives they were creating. Price-fixing does not solve problems, it only creates new ones. Sadly, destructive laws like this will continue to be written and never evaluated, because with all of their expensive and oppressive flaws, they were made with good intentions.