New Report Shows Folly of Tobacco Taxation

When bureaucrats try to tax and regulate a product out of existence, they succeed…in bolstering black markets. This was true when the U.S. outlawed “intoxicating liquors” more than one hundred years ago, and it’s true today when states like New York prohibitively tax tobacco and inadvertently create elaborate smuggling rings.

This phenomenon is hardly limited to the U.S. According to a recently released report by the consulting firm KPMG, heavy-handed government policies in Latin America and Canada are fueling illicit sales of cigarettes and corresponding criminal activity. Instead of doubling down on the same failed policies, officials in these countries—and around the world—should embrace a light-touch approach that puts consumers first.

In the eleven markets studied in the KPMG report (Argentina, Brazil, Canada, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Mexico and Panama), cigarette consumption is down—but that’s only part of the story. The researchers note, “Total cigarette consumption declined by 2.0% in 2025 vs 2024, mostly due to a 2.9% fall in Legal Domestic Consumption (LDC) … This decrease in LDC has been tempered by a smaller decrease in Non-Domestic consumption, with Non-Domestic inflows decreasing by 0.3%.” That’s a huge problem because 99 percent of these non-domestic inflows were “due to illicit cigarette consumption.”

Individual country trends are particularly concerning. For example, “In 2025, 41.8bn illicit cigarettes were consumed in Brazil, ~36% of total cigarette consumption in Brazil and ~54% of all illicit consumption across the 11 markets.” Given that the Brazilian tax rate on cigarettes is around 80 percent in most Brazilian states, and the country has one of the “highest tax burden[s] on manufactured cigarette prices in the world,” it is hardly surprising that black markets are booming. Chile also taxes cigarettes at roughly 80 percent and “saw the largest increase in illicit consumption” among the countries studied in the KPMG report.

These trends demonstrate a simple truth: when governments make products effectively impossible to get, consumers will turn to black markets. The U.S. learned this lesson the hard way in the early twentieth century with alcohol prohibition. Ratified in 1919, the Eighteenth Amendment to the U.S. Constitution banned the manufacture, sale, transportation, importation and exportation of “intoxicating liquors.” As historian and author of “Dry Manhattan: Prohibition in New York City” Michael Lerner noted: 

“As the trade in illegal alcohol became more lucrative, the quality of alcohol on the black market declined. On average, 1,000 Americans died every year during the Prohibition from the effects of drinking tainted liquor.” 

While the U.S. government ultimately ended this failed experiment, prohibitive tax regimes—and the resulting rise of black markets—betray a basic inability to learn from history. For example, New York has the highest taxes on tobacco products in the U.S., with an astounding 75 percent tax on wholesale products and a $5.35-per-pack cigarette excise tax. When taxes push legal prices far above production costs, they create a profit opportunity for illicit sellers and a financial incentive for consumers to seek cheaper alternatives. This often takes the form of cross-border purchasing (buying in low-tax jurisdictions and reselling in high-tax ones), counterfeit products, or unregulated imports. As the Tax Foundation noted in a 2025 report, New York’s high tobacco taxes have led to a preventable onslaught of smuggling. More than half the cigarettes consumed in the Empire State, an estimated 51.8 percent, weren’t purchased legally in the state.

Instead of learning from this failure, New York Governor Kathy Hochul wants to extend the 75 percent wholesale tax to nicotine pouches. This will not only compromise access to a reduced-risk substitute to cigarettes, but also further fuel black markets.

Whether in Brazil or Chile or New York, policymakers should take note of the spectacular failure of prohibition and runaway taxation. Bureaucrats should quit while they’re behind and ditch these failed policies.