Unintended Consequences of Cigarette Taxation and Regulation

Tobacco smoking harms health. Taxes and regulations can reduce that harm. But evasion reduces the efficacy of taxes and regulations and creates harms of its own in the form of illicit markets. Enforcement can reduce evasion but creates additional harms, including incarceration and violence. Peter Reuter has pointed out that a flat ban on cigarettes would be likely to generate illicit-market harms similar to the harms of existing illicit drug markets. Taxes and regulations can be thought of as “lesser prohibitions,” subject to the same sorts of risks. Minimizing total harm means minimizing the sum of abuse harms and control harms. Tighter regulations and higher taxes on cigarettes risk increasing the size of the existing illicit tobacco markets, which are already substantial. That risk can be somewhat blunted by increasing enforcement effort, but doing so can be costly on several dimensions and might, under plausible assumptions, lead to an increase in violence. Tobacco policymaking should therefore consider illicit markets and the need for enforcement; some of the health benefits of regulation and taxation may be offset by increased illicit-market side effects and enforcement costs. The presence of licit substitutes, such as e-cigarettes, can greatly reduce the size of the problem; the regulation of e-cigarettes should take this effect into account. If enforcement is to be increased to counterbalance tightened controls, positive-feedback dynamics suggest that the enforcement increase should precede, rather than follow, the tightening