Cigarette Taxes and Smuggling

Inspired by Orin Judd, I have looked up some articles concerning Canada's experience with large tax hikes on cigarettes and the resulting smuggling problems.

This is the best article I could find which describes the involvement of a Native American tribe, specifically the Mohawks of the Akwesasne Reserve which stradles the border of New York with Ontario and Quebec. Although it's not clear when the article was written (probably 1995, certainly 1994 or later) it also mentions that

Another important aspect of this dispute is the increasing violence accompanying the trade. Over the past five years, 75 members of the Mohawk nation have been killed in connection to the trade, an astounding number for a population of 7,000 people

This collection of newpaper clippings details various efforts to get around a 39¢ per pack increase (which is much smaller than the $2 that was proposed). The primary thrust appears to be Native Americans setting up kiosks from which consumers can order cigarettes over the Internet. The Native American tribes can legally avoid paying taxes because of their sovereign status. A related article mentions that the New York taxes have lead to increased smuggling and internet orders but because of state overspending the tax would not be repealed.

This report from the World Bank discusses the Canadian episode in §16.4.1.

For example, cigarettes exported from Canada to the United States would end up on the Akwesasne reservation, parts of which were located in New York and the provinces of Ontario and Quebec, facilitating the ‘round-tripping’ of the cigarettes back into Canada, where the cigarettes would then be distributed throughout Canada for resale at significantly lower prices than cigarettes sold legitimately

This article mentions that overall revenue dropped while the higher taxes were in place, which makes one wonder why a state desperate for revenues like New York would keep such a tax.

There is a mention of the problem here

The Canadian Experience. In 1991, Canada introduced a $5 per pack ($3.72 in U.S. dollars) tax on cigarettes. What did Canadian smokers do? A great number of them avoided paying the new cigarette tax and instead purchased their cigarettes from smugglers. According to a 1994 article in the Journal of the American Medical Association:

• An estimated 30 percent of cigarettes smoked in Canada were smuggled in and sold for about half the price of legal cigarettes.
• About 80 percent of those illegal cigarettes were manufactured in Canada, legally exported to the United States and then returned illegally.

In addition, cigarette smuggling became attractive to organized crime and increased the danger to law enforcement officials. It also created a hardship for the owners of small stores who relied on cigarette revenue. As a result, Canada eventually was forced to cut its cigarette tax in order to collect revenues