Understanding the U.S. Illicit Tobacco Market Characteristics, Policy Context, and Lessons from International Experiences (2015) / Chapter Skim
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4 Measuring the Size of the Illicit Tobacco Market
4 Measuring the Size of the Illicit Tobacco Market
Pages 77-110
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From page 77... ...
is differentiating between products that originate from legal sources from the minority of products originating from illegal ones.1 A number of methods have been used to grapple with these difficulties and produce estimates of the global size of the illicit tobacco market, as well as estimates for specific countries. The first section of this chapter describes and assesses seven different methods and provides estimates derived from each.
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From page 78... ...
Residual methods -- such as trade gap analyses, comparisons of self-reported consumption and tax-paid sales, and econometric modeling -- combine two or more sources of data on the illicit and licit markets to infer the scale of the illicit market. Direct measurement estimates, quantifying a particular segment of the illicit market, are based on such methods as empty pack collections and pack observation, return, and swap surveys, which are typically conducted in neighborhoods or cities.
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From page 79... ...
Comparing Tax-Paid Sales and Self-Reported Consumption Measures Levels of tax avoidance and tax evasion can be found by comparing the reported sales on which taxes were paid and self-reported cigarette consumption based on population surveys. Of course, there are many reasons why tax-paid sales and self-reported consumption may differ, such as underreporting of smoking prevalence and consumption by smokers, failure to include certain segments of the population in surveys (e.g., institutionalized populations, military)
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From page 80... ...
Econometric modeling has been used extensively to estimate the scale of the illicit tobacco market in the United States (see Becker et al., 1994; Yurekli and Zhang, 2000; Farrelly et al., 2003)
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From page 81... ...
, can be used to determine the prevalence of cross-border shopping, direct purchasing, and duty-free purchasing. Because there are few laws against purchasing illicit tobacco products, tobacco purchasers have little or no legal incentive to conceal their behavior.
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From page 82... ...
ILLICIT TOBACCO MARKET per day. Interviewers also asked participants to show their latest purchased pack of cigarettes or hand-rolled tobacco.
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From page 83... ...
surveyed discarded cigarette packs in New Zealand; Merriman (2010) used this method in Chicago, collecting littered packs in order to estimate the levels of tax evasion and tax avoidance of Cook County's and the city of Chicago's tobacco taxes; and Kurti and colleagues (2012)
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From page 84... ...
Empty pack surveys have also been used by the tobacco industry to estimate the size of the illicit tobacco market. However, researchers have questioned their findings and methodologies.
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From page 85... ...
If similar surveys are conducted over time, the relative scale of the illicit tobacco market may also be gauged. Pack return and pack swap surveys have been conducted in Europe and the United States.
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From page 86... ...
Expert Opinion A number of published estimates of the size and growth of the illicit tobacco market are based on surveying experts -- customs and law enforcement officials, industry representatives, researchers, tobacco control professionals, and other informed parties. Estimates based on this method often appear in trade and government publications (Merriman, 2001)
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From page 87... ...
Tobacco control advocates may have an interest in underestimating the extent of the illicit tobacco market in order to support their efforts to enact higher tobacco taxes. Law enforcement officials may have an interest in reporting higher levels of illicit trade in order to procure continued funding for enforcement efforts, or they may report lower levels of illicit trade in order to argue that their enforcement efforts have been effective (International Agency for Research on Cancer, 2011)
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From page 88... ...
. The failure to use publicly available and accepted data sources is noteworthy and highlights the importance of transparent and independent approaches to conducting research on the illicit tobacco market.
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From page 89... ...
These methods differ in sample sizes, time periods covered, and scientific rigor, and they yield different estimates and have different sources of error. In light of these factors, it is important to consider estimates from multiple methods in order to obtain the most comprehensive picture of the scale of the illicit tobacco market for a specific location and time.
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From page 90... ...
TABLE 4-1 Methods for Estimating the Illicit Tobacco Markets: Data Requirements and Availability, Strengths, and 90 Weaknesses Estimation Method Data Requirements Data Availability Strengths Weaknesses Trade Gap Data on exports and Appropriate data Very low cost; provable Does not detect bootlegging; imports by country and available in most and reproducible; relies on a questionable product countries "common-sense" results assumption about "lost" are easy to explain exports; difficult to determine local-level (i.e., country) estimates Comparing Tax-Paid Data on tax-paid sales Appropriate data Provable and High cost if cigarette Sales and Self-Reported and a variety of income, available in some reproducible; "common- consumption surveys not Consumption Measures demographic, and countries; primary sense" results easy to available; results may be population characteristics collection of data on explain; comparable to inaccurate in countries with in neighboring areas cigarette smoking similar data in other changing perceptions about necessary in some countries smoking countries Econometric Modeling Data on tax-paid sales Appropriate data Low cost if appropriate Does not detect large-scale and a variety of income, available in most expertise used; provable smuggling; requires high level of demographic, and countries and reproducible; expertise population characteristics comparable to similar in neighboring areas data in other countries Population-Based Consumer surveys follow Primary collection of Provable and Very high cost; requires Surveys a precise and established data necessary in most reproducible; potential high level of expertise to process countries bias discernable to those select appropriate survey who carefully study the locations; smuggling may be methodology underestimated in countries with strict legal codes; does not capture illicit transactions that respondents believe to be licit
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From page 91... ...
Empty Pack Collections Data on collected Primary collection of Low cost if appropriate Requires high level of expertise tobacco products in a data necessary in most expertise used; produces to select appropriate survey given area countries neighborhood and locations; can be difficult to community-level determine if appropriate taxes estimates were paid; does not capture loosies Pack Observation, Data on collected Primary collection of Able to reach Requires high level of expertise Return, and Swap tobacco products in a data necessary in most subpopulations of to engage representative samples given area countries smokers not reached in of smokers; can be difficult to survey-based methods; determine if appropriate taxes eliminates social were paid desirability bias and recall bias Expert Opinion Open-ended survey of Primary collection of Low cost; provides an Difficult to establish constant experts data necessary in most agreeable, "common- and consistent selection of countries sense" view; highly experts; results may not specialized training not be objective and cannot be required replicated NOTE: See text for discussion. SOURCE: Adapted from Merriman (2013)
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From page 92... ...
Methods, Data, and Measures Methods To develop its own estimate of the size of the illicit tobacco market in the United States, the committee used a residual method, specifically, comparing tax-paid sales and self-reported consumption measures. The committee chose to use this method for four reasons: (1)
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From page 93... ...
Physicians for a Smoke-Free Canada (2011) estimated the Canadian illicit tobacco market by calculating the difference between total cigarette consumption and legal consumption.
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From page 94... ...
and ran dom large seizures. The RCMP seizure data do seem to reflect, to some extent, the market forces in the illicit tobacco industry for the period under study.
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The committee then estimated cigarette tax evasion and avoidance by summing both statelevel deficits and surpluses between sales and self-reported consumption.
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From page 96... ...
. The committee then multiplied this annualized estimate of cigarette consumption by the estimated state-level smoker population to create a measure of total self-reported consumption of packs of cigarettes for each state (i.e., [annual self-reported consumption]
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From page 97... ...
, the net importing states lost an estimated $2.95 billion in excise taxes and roughly $2 billion in sales taxes, while net exporting states gained an estimated $0.82 billion in excise taxes. These figures can be compared with total tobacco tax revenue collections, which were $17.65 billion at the state and local levels in 2011 (Tax Policy Center, 2013)
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From page 98... ...
Table 4-4 shows the estimated state excise taxes gained and lost for 2010-2011 for the top five net exporting and importing states. The committee estimates that the state of New York loses the most revenue due to illicit tobacco purchases, nearly half of all revenue lost nationwide.
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From page 99... ...
rate with the U.S. Income Tax Code.6 At the state level, roughly 18 percent of taxes go unpaid, constituting a loss of roughly $136 billion.7 As another comparison, the Insurance Research Council estimated that in 2007, auto insurance companies paid between $4.3 and $5.8 billion dollars in fraudulent claims, between 11 and 15 percent of the dollar value of all claims.8 6 Once criminal prosecutions and late payments are taken into account, the total amount of tax revenue lost each year, primarily due to underreporting of business income, is $385 billion a year, or about 14.5 percent.
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From page 100... ...
100 UNDERSTANDING THE U.S. ILLICIT TOBACCO MARKET TABLE 4-3 Self-Reported Consumption and Tax-Paid Sales by State, 2010-2011 Ratio of Ratio of Adjusted Adjusted Self-Reported Tax-Paid Tax-Paid Self-Reported Self-Reported Consumption Sales Sales to Consumption Consumption (millions of (millions of Self-Reported (millions of to Tax-Paid State packs)
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From page 101... ...
MEASURING THE SIZE OF THE ILLICT TOBACCO MARKET 101 Adjusted Self-Reported Percentage of Consumption – Consumption Tax-Paid Sales State Average Smoking Lost Revenue Subject to Tax (millions of Tax Retail Price Prevalence (millions Avoidance and packs)
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From page 102... ...
illicit tobacco market, represented by the proportion of illicit purchases of cigarette packs through tax avoidance and
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From page 103... ...
The national percentage represents 1.24 to 2.91 billion packs and between $2.95 and $6.92 billion lost in gross state and local tax revenues. The illicit tobacco market is not evenly distributed across the country.
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From page 104... ...
New York State accounted for nearly half of the total revenues lost. Overall, the total amount of tax revenue lost to the illicit tobacco mar ket is roughly 10 percent of the total tobacco tax due, which is smaller than estimates of the "income tax gap" of 17 percent at the federal level and 18 percent at the state level.
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From page 105... ...
or Lost Top Five Net Exporters New Hampshire 42.31 126.60 70.54 0.56 –56.05 $1.78 $99,770,000 Delaware 27.52 79.93 45.88 0.57 –34.05 $1.60 $54,480,000 South Carolina 159.27 458.87 265.55 0.58 –193.31 $0.57 $110,190,000 Virginia 213.57 545.93 356.08 0.65 –189.85 $0.30 $56,960,000 Georgia 243.79 523.18 406.46 0.78 –116.72 $0.37 $43,190,000 Top Five Net Importers Washington 162.10 147.43 270.27 1.83 122.84 $3.03 –$371,580,000 New York 424.47 389.45 707.70 1.82 318.25 $4.35 –$1,384,390,000 Arizona 135.97 163.43 226.70 1.39 63.26 $2.00 –$126,530,000 Rhode Island 31.34 39.95 51.92 1.30 11.98 $3.46 –$41,440,000 Kansas 94.64 124.67 157.59 1.27 33.12 $0.79 –$26,160,000 NOTE: The measure used is the ratio of adjusted self-reported consumption (SRC) to tax-paid sales (TPS)
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From page 106... ...
The committee's estimate of the size of the illicit tobacco market in the United States also differs from other recent studies, and there are a number of possible explanations for these differences. First, the committee's estimates are likely lower because they reflect net transfers of cigarette packs between states.
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From page 107... ...
SUMMARY AND RECOMMENDATIONS The three basic methods for estimating the size of the illicit tobacco market -- residual methods (including trade gaps, comparing tax-paid sales and self-reported consumption, and econometric modeling) , direct measurement (surveys, empty pack studies, and pack observation, return and swap studies)
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From page 108... ...
illicit tobacco market is slightly larger as a share of the total market than the illicit market in Canada, which the committee estimates to be between 7.6 and 14.7 percent of the total market. 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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From page 109... ...
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) an expansion in the number and specificity of ques tions currently asked in representative population surveys regarding to bacco use and illicit tobacco market participation and (2)
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