Understanding the U.S. Illicit Tobacco Market Characteristics, Policy Context, and Lessons from International Experiences (2015) / Chapter Skim
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Pages 1-12
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The high rates of taxation and the large tax differentials between jurisdictions increase incentives for tax evasion and tax avoidance and contribute to existing illicit tobacco markets. Tax evasion means illegal avoidance of tobacco taxes and is done by individuals or criminal networks or other entities; tax avoidance means legal activities and purchases -- mostly by individual tobacco buyers -- that are in accordance with customs and tax regulations.
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These restrictions may create illicit markets for banned products, and as the FDA considers possible regulations for tobacco products, it is important to understand the potential effects of any such regulations on the illicit tobacco market. As part of its consideration of possible regulations, FDA asked the National Research Council (NRC)
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Countries with high measured levels of corruption have higher levels of tax evasion and tax avoidance than do countries with low measured levels of corruption. The behaviors of participants in the illicit tobacco market -- on both the supply and demand side -- shape and drive the illicit trade.
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For this reason, multiple methods should be used in order to obtain the most comprehensive picture of the scale of the illicit tobacco market for a specific location and time. Using its own estimate and plausible estimates from other methods, the committee determined that the percentage of the total market represented by illicit sales in the United States is between 8.5 percent and 21 percent.
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According to the committee's calculations, the net percentage of sales subject to tax evasion and tax avoidance has grown from 3.2 percent in 1992-1993 to 8.5 percent in 2010-2011. For states with both positive and negative tax differentials with neighboring states, the difference between tax-paid sales and self-reported consumption will underestimate total cross-border illicit trade.
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Public education campaigns aimed directly at the illicit trade also show some promise for reaching lower socioeconomic populations who disproportionately participate in illicit tobacco markets. Regulations and technologies to monitor and control the supply chain of tobacco products will have limited impact without enforcement efforts.
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Consideration of those determinants needs to recognize that both the legal tobacco market and the illicit tobacco trade are dynamic and adapt in response to regulatory changes. One key question in trying to assess responses to potential regulations is how modification of tobacco products, notably cigarettes, might affect product appeal.
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Because aggressive policies on tobacco products are new in the countries that have adopted them, there have been few studies of their effects on illicit markets. Research on the emerging effects of regulatory actions in other countries, such as Brazil's pending ban on tobacco additives (including menthol)
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In summary, however, there is insufficient evidence to draw strong conclusions about how the illicit tobacco market would adapt in response to permanent modifications to tobacco products as the result of any new regulations. RECOMMENDATIONS FOR RESEARCH AND DATA COLLECTION In order to better understand the nature of existing illicit tobacco markets and the ways in which they may evolve in the future, additional research and improved data are needed across a broad range of issues.
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The National Youth Tobacco Survey should add items that would clarify the nature of the "other commercial sources" that have become more prevalent in recent years. RECOMMENDATION 4-1 The Tobacco Use Supplement to the Cur rent Population Survey should be expanded in both the number of questions and specificity of questions currently asked regarding tobacco use and illicit tobacco market participation.
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RECOMMENDATION 4-3 Methods should be improved in order to better differentiate between tax evasion and tax avoidance. More ac curate estimates of the size of the illicit market separately attributable to tax avoidance and tax evasion could be obtained by combining more systematic data collection on discarded packs in states with significant illicit trade with (1)
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RECOMMENDATION 8-2 Research is needed on the relationship between the use of e-cigarettes and the use of conventional tobacco products and on the role of e-cigarettes as an alternative to partici pation in the illicit tobacco market. Longitudinal studies are needed to understand the dynamics of the relationship and to determine the extent of full substitution of e-cigarettes compared with dual use or reversion to conventional products.
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