In New York, smokers can pay $14.50 a pack. In Kentucky, the price can be less than five dollars. As a result, smugglers buy huge numbers of cigarettes in states with lower taxes and resell them in states with higher taxes—even if that's not quite legal. Fifty-seven precent of cigarettes sold in this country are smuggled in from states with lower tobacco taxes, according to a new study by the Tax Foundation.
The Tax Foundation is a conversative think tank that supports "pro-growth tax reform"—which usually means lower taxes. Whether or not state taxes on cigarettes are too high, the difference between states' prices does create an incentive to smuggle them across state lines. Profits can be huge, and often that money goes towards more dangerous enterprises, like organized crime and drug rings.
This problem goes way beyond the United States. Cigarettes are smuggled across the world, usually flowing into areas where they are normally taxed heavily. From the International Consortium of Investigative Journalists:
Experts estimate that contraband accounts for 12 percent of all cigarette sales, or about 657 billion sticks annually. The cost to governments worldwide is massive: a whopping $40 billion in lost tax revenue annually. Ironically, it is those very taxes — slapped on packs to discourage smoking — that may help fuel the smuggling, along with lax enforcement and heavy supply....
Iran, though, is an interesting counter-example, where, in a roundabout way, the government may benefit from smuggling.
While there are plenty of differences between the United States and Iran, in both countries the portion of the adult population that smokes tobacco hovers around 20 percent. But while American smokers spend exorbitant amounts on tobacco products, Iranians get their fix for much less, spending just $0.50 for a domestic pack, and $2.00 for a smuggled import. According to a 2009 article in the scientific journal Tobacco Control, in Iran, "20.9% of cigarettes and 6.7% of domestic branded cigarettes were smuggled. A total of 60.1% of smokers preferred foreign cigarettes."
These smuggled cigarettes often get into the country via the sea, smuggled into the country at dusk from Oman, writes Esfandyar Batmanghelidj, a researcher with the Iran Tobacco Research Group, for Roads and Kingdoms. But, Batmanghelidj asserts, unlike in the U.S., the Iranian government has a good reason to look the other way.
Cigarette smuggling, he explains, disrupts the dynamics in the country's bazaars. These markets were once the site of public protest and organizing by political opposition. But now, Batmanghelidj writes:
In the black market, costs of defection are high; either the merchant remains allegiant to his supplier, or he looses access to lucrative products that cannot be readily sourced from anywhere else. When the supplier is strong enough to have a monopoly on the goods in question, the supplier gets to decide the terms of any arrangement—either you play by his rules, or you are out of the game. Such a cutthroat environment fundamentally reshaped relations within the world of the bazaaris, forcing the merchant class into grudging reliance on state-controlled channels of goods and funds. The economy of contraband goods neutered the bazaar’s ability to function as a site for opposition politics.
This sort of complicated legal manuvering is "something of a theme" in Iran, says Batmanghelidj: "Even the failures in its rule of law can be seen as a boon to the state." In the United States, cigarette smuggling is less tied up in national politics: people seem just to want to smoke without spending too much money.