There’s a running joke among political science majors like me: whenever lawmakers raise a tax “for the revenue,” they’re always shocked when the revenue doesn’t show up. And nowhere is that more painfully obvious than in the latest Tax Foundation data on cigarette smuggling. What states have created isn’t a healthier population or a stable revenue stream; it’s a multibillion-dollar underground economy that thrives precisely because legislators refuse to acknowledge basic economics.
According to the Tax Foundation, states collectively lost over $4 billion in cigarette tax revenue in 2023 alone due to smuggling. That’s not a rounding error. That’s an entire state budget department vanishing into thin air. Stretch the timeline back to 2007, and the long-term estimate exceeds $80 billion in lost revenue that lawmakers assumed they would collect but never did. Instead, the money flowed into the pockets of smugglers, counterfeiters, tax-stamp forgers, and organized criminal networks that couldn’t believe their luck.
Let’s be clear: lawmakers created this problem themselves. When a state like New York sets its cigarette taxes sky-high, over $5 a pack before city taxes, you don’t get a reduction in smoking equal to the scale of the tax hike. You get something else entirely: a massive incentive to buy cigarettes somewhere else. And that “somewhere else” isn’t hard to find. A quick drive to Virginia or Pennsylvania will do the trick. Criminal networks figured this out years ago, which explains why the highest-tax states are the ones with the most outrageous smuggling rates.
This is the part where economists politely remind governors and state budget committees of a simple reality: if you create a huge tax gap between two jurisdictions, you’ve also created a lucrative arbitrage opportunity. Cigarettes are small, light, high-value per unit, and easily transported, making them one of the most “smuggle-friendly” products on the planet. Shockingly, criminals have noticed.
What lawmakers seem unwilling to admit is that black markets respond to incentives far more efficiently than most state agencies. If a carton is $110 in New York but $50 in Virginia, a market will emerge in the middle. No task force or tax-stamp hologram can defeat that basic math. Yet every year, high-tax states confidently predict higher revenue from even higher taxes, and every year the black market grows stronger because it’s built on the back of policy choices that practically invite criminal participation.
There’s also a moral dimension lawmakers pretend doesn’t exist. It’s ironic to watch states justify high cigarette taxes on “public health grounds” while ignoring the consequences of the black market they’ve created, counterfeit cigarettes with unknown ingredients, criminal distribution networks, and the reallocation of billions of dollars away from legitimate businesses and into illicit pipelines. If the goal is to reduce smoking, it makes no sense to push smokers from regulated products into underground ones with far fewer safety controls.
And here’s the kicker: even if you support using cigarette taxes to curb smoking, there’s a ceiling on effectiveness once the black market becomes large enough. If smokers can simply avoid the tax by going out of state or buying from illicit sellers, then the tax isn’t reducing consumption; it’s only reducing compliance.
The solution is not complicated, but it requires something lawmakers often resist: humility. States need to recalibrate their tax rates to reduce the massive gaps between high- and low-tax jurisdictions. They need regional cooperation, not unilateral grandstanding. And they must acknowledge that the difference between revenue projections and revenue reality is not a mystery; it’s the entirely predictable behavior of consumers acting rationally when government policy becomes irrational.
Here in Maryland, policymakers should pay close attention. We sit between Virginia (low cigarette taxes) and states like New York (extremely high). If our tax rates rise too far while our neighbors remain low, we’ll invite the same smuggling wave that’s overwhelming New York and parts of New England. Before state legislators fantasize about new revenue streams, they should take a serious look at the billions in revenue other states have already lost chasing the same illusion.
In the end, the Tax Foundation’s findings should not spark outrage; they should spark introspection. States didn’t lose billions because smokers suddenly became tax experts. They lost billions because lawmakers ignored Econ 101. And until tax policy starts respecting reality instead of wishful thinking, the black market will keep winning, consumers will keep evading, and states will keep wondering why the money they planned on collecting keeps ending up somewhere else.
Endnotes
- Tax Foundation, “Cigarette Smuggling by State, 2023,” Tax Foundation, accessed November 17, 2025, https://taxfoundation.org/data/all/state/cigarette-smuggling-costs-states-billions-tax-revenue/.
- Ibid.
- Jacob James Rich, “Cigarette Taxes Are Costing States Billions in Lost Revenue,” Reason, November 14, 2025, https://reason.com/2025/11/14/cigarette-taxes-are-costing-states-billions-in-lost-revenue/.
- New York Association of Convenience Stores (NYACS), “Cigarette Taxes and Smuggling by State,” NYACS Policy Background Report, 2024, https://nyacs.org/images/agenda/Cigarette-Taxes-and-Cigarette-Smuggling-by-State.pdf.
- Ibid.
- Tax Foundation, “Cigarette Smuggling by State, 2023.”
- Ibid.
- Reason Foundation, “Cigarette Taxes and Cross-Border Economic Incentives,” Reason Foundation Working Paper, 2025.
- Tax Foundation, “Cigarette Smuggling by State, 2023.”
- NYACS Policy Background Report, “Cigarette Taxes and Smuggling by State.”
- Tax Foundation, “State Cigarette Tax Revenue Loss Data,” Tax Foundation Data Tools, accessed November 17, 2025.
Aaron Ackerman is a contributor to Direct Line News. He can be contacted at Aaron.Ackerman@mcgopclub.com
Direct Line News is a Maryland-based free-access publication committed to the Republican reform tradition.
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