Taxes influence behavior – evidence from cigarettes

Here’s something that’s easily overlooked. When sin taxes get too high, sinners figure out a way to beat the system. 

Melissa Santos writes in The News Tribune about cigarette taxes. 

Washington state has steadily raised its cigarette taxes in the last 20 years as a means to both curb smoking and raise revenue.

At the same time, though, something else has gone up: The rate at which people evade the tax by buying cigarettes out of state or online.

Nearly one-third of Washington’s potential cigarette tax revenues were lost to smuggling or tax evasion in the 2013 fiscal year, according to estimates by the state Department of Revenue.

It’s a nicely researched article, underscoring the tale of diminishing returns. 

Tax evasion is a crime. But taxation does influence behavior in other, legal, ways. High business taxes, for example, can cause industry to relocate or expand in more tax friendly jurisdictions. It’s not just the sinners that understand the system.