Cartels stand to capitalize as Mexico eyes big tobacco tax hike

The Mexican Senate is considering a bill to increase the tobacco tax, arguing that it would improve health by discouraging use and increase the government’s bank account.

It could also fill the accounts of some of Mexico’s major cartels. Experts say the cartels have a significant hand in Mexico’s black market for cigarettes and stand to gain an even bigger share from the tax.

President Claudia Sheinbaum has called for raising Mexico’s ad valorem tobacco tax from 160% to 200%. The per-cigarette quota tax would nearly double by 2030.

The inevitable result would be a bigger black market for cartels to exploit, said Manuel Perez Aguirre, a postdoctoral researcher at the College of Mexico.

“The government, the representatives, are looking for more money, but they are not taking into account the side effects of that,” he said. “It’s a huge thing in terms of money, not for the Mexican government, but it’s a lot of money for the criminal organizations.”

Mr. Perez identified Mexico’s two most prominent cartels, the Sinaloa Cartel and Jalisco New Generation Cartel, or CJNG, as particular players.

He said estimating the cartels’ additional take from the tax would be difficult. The amount would depend on how much consumers turn to the illegal market and how much the organizations control.

A large shift, though, is imaginable.

When tobacco taxes were raised in 2011, illegal cigarettes jumped from 2% of the market in 2010 to nearly 17% by 2013, according to one study that year. The latest estimate puts the figure as high as 20%, though it’s unclear how much would go to cartels.

President Trump’s quick action to shut down migrant smuggling across the U.S.-Mexico border has hit the income of Mexican cartels.

Still, the organizations have been increasingly diversifying their activities.

The U.S. government this year imposed sanctions on cartel associates that the Treasury and State departments determined were engaged in oil theft and timeshare fraud. They also sanctioned a “narco-rapper” who dedicated half his music streaming revenue to the Cartel de Noreste.

“These cartels continue to create new ways to generate revenue to fuel their terrorist operations,” Treasury Secretary Scott Bessent said in August while announcing the sanctions on CJNG for duping Americans with bogus timeshare sales and maintenance contract offers.

Mr. Perez said “drug cartels” is no longer an accurate term.

“They’re organized crime, and they are involved in almost every single topic of the Mexican economy,” he said.

The Trump administration has designated six Mexican cartels, including CJNG and Sinaloa, as foreign terrorist organizations.

The tobacco tax is part of Ms. Sheinbaum’s 2026 economic package, which would also increase tax rates on soft drinks, gambling and lotteries and impose a tax on violent video games.

She figures the taxes would raise about $750 million annually. She has said the money would directly fund health programs, though critics counter that the law doesn’t appear to earmark the money that way.

The package passed Mexico’s Chamber of Deputies this month and is now awaiting final action in the Senate.

Caroline Renzulli at the Campaign for Tobacco-Free Kids cheered Mexico’s proposal. She said tax increases have proved to be the most effective way to cut tobacco use, particularly among children.

She dismissed the cartel worries, which she attributed to “greatly exaggerated” tobacco industry claims.

“In fact, research shows that higher tobacco taxes do not drive illicit trade, but that lax law enforcement, weak penalties and corruption are all contributing factors, underscoring the need for strong tax administration, supply-chain monitoring and penalties for illegal sales,” she said. “Mexico and other countries must stand up to the tobacco industry and act to save lives.”

Mexican opposition to the plan has been based on worries of harm to retailers.

The head of the Council for the Development of Small Trade and Family Business figures the tax hike would raise the price of a pack of legal cigarettes to a little more than $5, while a contraband pack sells for about $1 on the streets, Mexico Business News reported.

Mr. Perez said the cigarette market is easy for the cartels to penetrate, partly because of illicit cigarettes slipping into the country from the U.S.

“Goods from the East — China or Japan or Bangladesh or India — many of them pass through to the United States, but your government doesn’t do anything because the end of that chain is not the United States. So they just pass through the United States,” Mr. Perez said.

In a January paper, he suggested that CJNG produced its black market product while Sinaloa controlled border smuggling. He has now concluded that the market is so liquid that the border situation and domestic production are complementary.