Technical Note—On the Estimation of Smuggling in a “Gray Market” Commodity

Abstract

This note develops a method for estimating the amount of cigarette smuggling occurring among the various states. This particular organized crime is termed a “gray market” activity because the commodity is not illegal but is differentially taxed by the states, thus leading to illegal importing from low-tax states to high-tax states. Sales tax, demographic, and geographic data are combined in a mathematical model of the smuggling operation, which is used to estimate the amount of smuggling into a state and its impact on the state's revenue. It should be useful in determining the effectiveness of programs aimed at reducing cigarette smuggling.