The tobacco black market

A good story in Stuff on the black market in tobacco:

For smokers, the habit is getting increasingly expensive as the Government ups its tax to discourage smoking and recoup some of the health costs.

A pack of 20 cigarettes is expected to cost about $30 by 2020. A 50g packet of premium loose tobacco, used in roll-your-owns, currently costs about $78.

That is big money for hard-up smokers who are turning to the black market to buy stolen cigarettes and illicit loose tobacco.

Customs estimates the market for illegally manufactured or smuggled tobacco represents 2 to 4 per cent of consumption and is “not a significant problem”. Its figures are based on a 2013 report by Action Smoking and Health (Ash), which excludes stolen tobacco products. 

Police believe the black market is fuelling armed robberies and burglaries, with criminals targeting dairies and stealing tobacco products for resale rather than for personal use. 

This is the policy challenge. It is clear increasing the tax on tobacco is an effective tool to reduce smoking rates. But the higher the cost becomes, the more enticing the black market becomes. This is the same reason prohibition of alcohol failed in the 1930s – if you have demand, and no legal affordable supply, then the black market flourishes – and crimes become more profitable.

As an example, Stuff  visited an Aranui home and bought 80g of loose tobacco for $80 from 21-year-old Jasmine Lasseter, who was advertising on Facebook.

Lasseter claimed the tobacco was “factory seconds”, sourced from a local business owned by her friend’s father. She got a kilogram at a time so she never ran out.

Initially acknowledging she avoided paying tax on the tobacco, when confronted later she changed her story.

Lasseter’s Facebook page indicates her sales amount to at least 1kg of tobacco each week. She offers discounts for regulars.

Surprisingly sellers like Lasseter appear to be operating unhindered by Customs, which is responsible for collecting the duty on tobacco.

A Customs spokeswoman said the agency would look into reports or information “provided to us” and “enforce any offences discovered in relation to illegal tobacco”.

Customs did not ask for details of Stuff’s sting although those were supplied later.

So Customs is not at all proactive in this area, and even when informed, they don’t even ask for details.

BAT spokesman Saul Derber estimates the size of the black market has at least doubled since the 2013 Ash report.

“I would say 1 to 2 million 30g pouches (worth about $45 each) are being sold on the streets of New Zealand without any tax being paid, without any health warnings applied and no concerns about what age group they’re selling to. Sales are rife of chop chop (illicit tobacco).”

The tobacco giant acknowledges a vested interest — illegal sellers are eating into their profits.

It believes the Government, which collects more than $1 billion in tobacco tax annually, should be more interested in tackling the issue.

Again this is the policy challenge. The more you tax and regulate the legal product, the more the illegal product flourishes which has no age limits for selling, no effective regulation and no tax.

This is not an argument against taxing tobacco and regulating it. But it is an argument that you should always look at the unforeseen consequences and how to mitigate them.