Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences

Committee on the Illicit Tobacco Market: Collection and Analysis of the International Experience; Committee on Law and Justice; Division of Behavioral and Social Sciences and Education; Board on Population Health and Public Health Practice; Institute of Medicine; National Research Council

In response to the documented addictive and harmful health effects of tobacco use, governments worldwide and at the local, state, and federal levels in the United States have adopted various policies to reduce or eliminate tobacco use. Common measures in the past decades have included high taxes on tobacco products and bans on advertising. Tobacco use, notably the smoking of cigarettes, has declined because of these efforts, but worldwide there are still more than 1 billion people who regularly use tobacco, including many who purchase their products illicitly. Illicit tobacco markets can undermine public health efforts to reduce tobacco use. These markets can also deprive governments of revenue; in the United States, these losses are especially incurred by the states.

In comparison with other consumer products, cigarettes are currently subject to high taxes in the United States and in most other countries. Those high rates of taxation and 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.

In the future, nonprice regulation of cigarettes—such as product design, formulation, and packaging—could, in principle, contribute to the development of new types of illicit tobacco markets if incentives for such illicit trade are not controlled or mitigated. Although the U.S. Food and Drug Administration (FDA) does not have taxation power or the authority to enforce tax compliance, the Family Smoking Prevention and Tobacco Control Act of 2009 gave the FDA significant authority to regulate the manufacturing, marketing, and distribution of tobacco products. The FDA cannot ban nicotine entirely, but it can prohibit or restrict allowable levels of the constituents and additives in tobacco products, which could include the reduction of nicotine to a sub-addictive threshold. The FDA can also regulate tobacco packaging and messaging. 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) and the Institute of Medicine (IOM) to assess the international illicit tobacco market, including variations by country; the effects of various policy mechanisms on the market; and the applicability of international experiences to the United States. The FDA also asked for recommendations for research and data collection, though not for policy. The Committee on the Illicit Tobacco Market: Collection and Analysis of the International Experience was appointed to carry out this task. Because the illicit tobacco trade largely coincides with the illicit trade in cigarettes, the committee report uses the terms “tobacco” and “cigarettes” interchangeably.

View the press release here and the full report here.  Briefing slides accompanying the report can be found here.

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February 2015

Authors:
Peter Reuter (Chair)
Martin Bouchard
Frank J. Chaloupka
Philip J. Cook
Matthew C. Farrelly
Geoffrey T. Fong
Rachel A. Harmon
Edward R. Kleemans
Conrad Phillip Kottak
Michael Levi
Emily Owens
Vaughan W. Rees
Anthony D. So
Klaus von Lampe
Heather Wipfli