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At least we’re Not New York

By Michael D. LaFaive and Todd Nesbit, Ph.D., Mackinac Center

Last week one of these authors (LaFaive) had the pleasure of working with a network of colleagues on an important economic measure published annually by the Fraser Institute. It is known as the “Economic Freedom of North America” index and it is designed to objectively measure economic freedom in the 50 United States, Mexican states and Canadian provinces by the degree to which each is more or less economically free.

The Fraser Institute does this by collecting data in three major categories: taxes, government spending and labor market regulation. The U.S.-specific index rank for Michigan is a disappointing 32nd, but New York is 50th. As U.S. states go, New York is deepest in the economic freedom hole, and its lawmakers won’t stop digging. Consider as one recent example the way it handles tobacco control.

New York has long been the Empire State of cigarette tax evasion and avoidance, what we call “smuggling.” The Mackinac Center annually measures the degree to which cigarettes are smuggled in the U.S., as well as into Canada or from Mexico. New York has had the worst smuggling rate since 2011. It’s about to get worse.

New York State has just raised its state excise tax to $5.35 per pack from $4.35 (a 23% increase). This additional tax burden will not only result in a cigarette smuggling increase, but a net loss of tobacco tax revenue, too. Large tax hikes like that are what has kept New York in last place in the Fraser Institute’s ranking.

We employed our model of cigarette smuggling to estimate that New York’s smuggling rate would increase to a staggering 66% of state consumption there and cigarette tax revenue would drop by 7.8% as a result. This is a tax hike that will cost New York money. And it will further increase the lawlessness in a state where most people already get their cigarettes via tax evasion and avoidance.

The model we use compares tax-paid sales with reported smoking rates by state. The difference between what is getting bought and what is getting smoked must be explained and we attribute that difference to smuggling. Other scholars have also found that New York has a smuggling problem.

That’s the bad news. New York also recently dodged another prohibition bullet. Political leaders there were actually contemplating a full ban on menthol smokes — an estimated 37% of the U.S. market in 2021 — which would have exacerbated the problem.

All of this makes Michigan policymakers look positively sound and thoughtful, at least on tobacco policy. Our excise tax on cigarettes has not increased since 2004 and there is no current attempt to ban menthol cigarette sales statewide. At $2.00, Michigan’s cigarette tax is nearly the average of sister states Ohio, Indiana, Illinois and Wisconsin, reducing the likelihood of broad inbound smuggling.

Because of our more rational cigarette tax burden, Michigan has seen its smuggling rate waft downward from a high of nearly 35% in 2006 to just over 18%. This news should not be an invitation to mimic New York and hike taxes through the roof or — perhaps worse — contemplate a ban on menthol altogether.

Of course, taxes, be they excise, personal income, payroll or property are just some of the policies that impact states’ freedom scores. Other policy areas such as government spending and labor market regulation do as well and add up to interference that often does more harm than good.

Scholars from universities across the country have used the Fraser Institute’s dataset to look for connections between how free a state is economically and all sorts of outcomes. They have overwhelmingly found positive links between economic freedom and such things as faster economic growth, more entrepreneurship, increased employment, employment rates and interstate migration.

New York and Michigan governments need to refrain from undue meddling in their state and local economies. The Empire State is upping its interference game with its recent 23% cigarette tax hike. This will not help it improve its economic prospects, and likely not its peoples’ health prospects either.

The Great Lake State should not use New York as its policy North Star but rather as a case study in what not to do.


Michael LaFaive is the senior director of the Morey Fiscal Policy Initiative for the Mackinac Center for Public Policy. Todd Nesbit, Ph.D., is assistant professor of free enterprise and entrepreneurial economics at Ball State University.