Unintended consequences of tobacco taxation and regulation

Tobacco smoking harms health. Taxes and regulations such a bans of particular types of tobacco ingestion can reduce that harm. But evasion reduces the efficacy of the policies and creates harms of its own in the form of illicit markets. Enforcement can reduce evasion but creates additional harms, including violence and other crime. 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.

This paper discusses the relationships among regulations on cigarettes, enforcement effort, and violence.  In the first part of the paper, we conduct a systematic review of drug-law enforcement and violence, via a meta-analysis of empirical studies.  The weight of the evidence falls squarely on the side of a significant positive association between enforcement intensity and violence. In the second part of the paper, we construct and analyze a novel microeconomic model of a cigarette ban, and examine the impact of the increasing enforcement efforts on violence and other crime.  The model shows that while in general the impact of increasing enforcement on violence is ambiguous, under plausible assumptions chosen to reflect reality in the cigarette market, more enforcement will lead to more violence.  The chain of causality between enforcement and violence in the model is that stricter enforcement generally raises the price of cigarettes in the black market, which raises illicit revenue, which incentivizes more criminal activity and the violence that attends it.

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.