The Laffer curve in tobacco tax

It turns out that if you can keep your tobacco tax low when all around you are raising theirs, you'll be quids in, my son:

"At $4.35 per pack, New York State's cigarette excise tax rate is by far the highest in the nation and 31% to 63% higher than surrounding states, making cross-border purchases lucrative," Calvin said. "Tribal stores continue to sell cigarettes to non-Indian customers tax-free in defiance of New York State law, and there is a steady flow of smuggled product from Virginia and other distant, low-tax states."

60% of all New York smokes are smuggled in, thereby bringing in zero tax for the state. Near-neighbour New Hampshire taxes at $1.78 per pack and suffers a 26% smuggling rate - except that's smuggling out of the state after being bought there... From every 100 packs consumed in NYC, the state raises $174, but from 100 packs consumed in NH, the state raises $178. Smuggling is a complete no-brainer; assuming the average New Yorker lives 1.5 hours drive from a state that sells cigarettes at NH rates, the 3 hour round trip in a reasonably-sized car would cost about 2/3 of a tank of gasoline, say $40-$50. Assume a value of time of $20/hour, and two people, making $120. So they just have to get a $170 return on their purchase, with the cost differential being $2.50 per pack. That's 68 packs.

It's clear that if NYC raises taxes further, its cigarette tax income will drop further. Who's going to bet that they won't be that stupid, though?

This should be a lesson for the UK Government. I view the claims of reduced consumption rates of smuggled cigarettes with deep scepticism. There's illegally smuggled tobacco and then there's tobacco brought back for "personal" consumption that's then stretched to family, friends, the guys in the pub... The cases of tobacco smugglers bringing back hundreds of kilos into the country are proof that there's a sizeable demand for cheap tobacco in this country.