Association for Public Policy Analysis & Management

As the FDA considers possible regulations for tobacco products, it is important to understand how any such regulations could affect illicit tobacco markets.  The FDA asked the National Research Council and the Institute of Medicine to assess the U.S. and international illicit tobacco markets, the effects of various policies on the market, and the extent to which international experiences apply to the United States.

In the United States, the illicit tobacco market consists mostly of bootlegging from low-tax states such as Virginia to high-tax states such as New York.  That contrasts with the illicit tobacco markets in other countries, which also include substantial portions of illegally produced and internationally smuggled cigarettes.  There is no evidence to support claims that these markets are significant for the financing of terrorism or for organized crime.

The portion of the total U.S. tobacco market represented by illicit sales is between 8.5 percent and 21 percent, representing between 1.24 to 2.91 billion packs of cigarettes annually and between $2.95 billion and $6.92 billion in lost gross state and local tax revenues.  Almost half of the loss occurs in New York State, which has very high tobacco taxes.  The effort to enforce tax laws against bootlegging appears to be slight; nor has there been much effort to use new, low-cost, track and trace technology that allows for much better monitoring of bootlegging. 

While there is not enough evidence to draw strong conclusions about how the illicit market will respond to any modifications to cigarettes resulting from new regulations, the limited available evidence suggests that demand for illicit versions of the current conventional cigarette may be modest.