Bob McManus - There is nothing intrinsically wrong with using tax policy as a social tool—the mortgage-interest deduction encourages home ownership—but great care should be used when doing so. The law of unintended consequences is ever present. Consider that [Philadelphia Mayor] Kenney’s tax adds 30 cents to the price of a 20-ounce bottle of soda, or $1.80 per six-pack. ... For retailers who deal in, say, 100-case lots ($720), or major-market wholesalers handling 10,000-case shipments ($72,000), the temptation to integrate untaxed product into their inventories and pocket the difference is obvious. That’s how social-engineering taxes create black markets.
New York has had this experience with cigarettes... The Mackinac Center for Public Policy estimates that some 60 percent of the cigarettes smoked in New York—six packs in every ten-pack carton—were smuggled into the state. This isn’t surprising, given that combined city and state taxes amount to $5.85 per pack and drive the cost of a legal carton north of $140 in some parts of the city. Compare that to the standard $40-per-carton at Indian reservations and in low-tax states like Virginia and North Carolina and the payday for smugglers becomes compelling. Just last month, city and state tax officials took down a Chinatown-based smuggling ring that allegedly imported a million packs of contraband smokes into the city every week—roughly $10 million worth, or a potential half-billion-dollar-per-year market.