NPR discussed Michigan’s Cigarette Excise Tax today and the new law which allows stiffer penalties on smuggling; did you know that smuggling cigarettes is big business? It is estimated that almost 35 percent of all cigarettes consumed in Michigan have been brought in illegally.
Some lawmakers insist that stronger penalties combined with higher cigarette tax will not only solve the problem, but raise more money. The logic goes like this, “If something isn’t working, do it even more”.
We don’t need to raise the cigarette tax, we need to lower it and not by a few cents, but by $1.25
Smuggling occurs because surrounding states have drastically lower taxes. Take a look at the cigarette tax for our state and compare it to those surrounding us:
- Michigan $2.00
- Wisconsin $1.77
- Ohio $1.25
- Illinois $0.98
- Indiana $0.995
Indiana and Illinois are enjoying far greater return on their tax than we ever will at $2.00! That’s 35 percent of our revenue lost to the surrounding states.
If out of 1000 smokers, 350 buy outside the state, that means we receive (650 x $2) $1,300 and lose (350 x $2) $700 to surrounding states.
If we lower the tax to 75 cents, we would then see a massive increase in revenue. Because the tax is the lowest of surrounding states, there is no need to smuggle cigarettes in and all 1000 smokers end up buying local – we end up with (1000 x .75) $750
If you consider only our state, one might think that the higher tax is better, but we need to consider that the smokers in the surrounding states will now turn to Michigan to buy their cigarettes.
Assuming for simplicity sake that each surrounding state also has 1000 smokers each and we’re only considering 4 states, that would be another (350 x 4) 1400 sales or (1400 x .75) $1,050 in taxes.
If you take the additional taxes from people out of state buying our cigarettes and add in the money from our own citizens, that comes to ($1,050 + 750) $1,800 – a profit of $500 per thousand smokers!
But, that’s just the tip of the iceberg. Consider this:
- Calculations assume each smoker only consumes 1 pack per year. In actuality, smokers average 1 pack per day, so that’s 365 packs per smoker.
- We used a figure of 1000 smokers per state, that number is more in the range of 375,000 and above depending on the size of the state.
- We considered the surrounding states, but at a tax as low as 75 cents, we’ll be attracting buyers from many more states than the ones we mentioned! The lower the tax, the more buyers.
The numbers are Hugh! The State of Michigan would not only have a phenomenal amount of tax revenue, but there would be more than enough for education and health care combined (these two continually battle for cigarette tax revenue).
If you think this isn’t playing fair, ask yourself why Illinois and Indiana are so close in cigeratte tax and yet so much less than Michigan (or other states for that matter).
For details on the Cigarette tax in Michigan, check out Mackinac.org