Back in April lawmakers increased Washington's cigarette tax by a $1 a pack bringing the total to $3 per pack. While this proposal was being debated we highlighted a Michigan study that warned this type of tax increase would not lead to increased revenue but instead to increased cigarette smuggling and a growth of the black market.
The Michigan-based Mackinac Center warned:
"The 2008 study already found that Washington has the fourth highest smuggling rate. In applying the model to the proposed tax increases, we found that a $1.00 per pack increase in taxes would jump the state's smuggling rates from 39.3 percent to 51.5 percent.
Legal sales would decrease by at least 20 percent over 12 months. This is evidence not of people quitting smoking due to higher taxes, but of individuals and businesses finding ways to evade cigarette taxes. A 2004 study helps confirm this by finding that up to 85 percent of the sales tax decrease comes from tax avoidance rather than actual declines in smoking.
The bulk of the cigarette smuggling increase comes from commercial smuggling--of organizations that import cigarettes from lower tax areas or through counterfeiting with distribution systems in state. If the tax hike passes, it's expected that 3 out of 10 cigarettes in Washington will be through these means."
Based on a KING 5 TV investigation, it looks like the Michigan researchers were correct in their analysis. According to KING 5:
"In the months before May, prior to the new tax, the state sold an average $44 million worth of cigarette stamps. That's 44 million tax dollars generated each month. In the months since the tax, that average has dropped to about $34 million. That means 10 million fewer tax dollars are being collected per month . . .
The Washington state Department of Revenue, the tax collectors, estimates that soon one of every three cigarettes sold in Washington will be untaxed contraband.
Most of them are illegally sold in Washington after being trucked in from neighboring states like Idaho where the tax on each pack is only 57 cents.
But law enforcement sources tell us that sophisticated, international smugglers have also moved in."
It appears that lawmakers who attempt to sin tax their way to balanced budgets may be suffering from the delusions of a pipe dream.
UPDATED (12:35 p.m.)
I just received a note from the Department of Revenue saying that the tax figures used in the KING 5 report are inaccurate. According to DOR:
"Seasonally adjusted stamp sales are down as expected, but revenue is up. It also is premature to make conclusions based on four months of data. The big drop in stamp sales in June may be due in part to smokers stocking up on cigarettes prior to the tax hike, and that pulled down the average for the first three months. Sales bounced back in July."
DOR did confirm, however, that contraband cigarette sales are expected to increase from 22% to 34% of all sales or 1 out of every 3 sales as a result of the tax increase.
