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The problem is that as you raise taxes you have to plan ahead on a diminishing revenue stream.

A report from Prudential Securities estimated that about 3 percent of all cigarettes sold in 2002 were acquired over the Internet.[151] A forthcoming paper by economists Austan Goolsbee, Michael Lovenheim and Joel Slemrod, however, concludes that governments will probably find that their ability to raise revenue through cigarette tax hikes is undermined by Internet cigarette sales.[152] The potential of revenue losses from World Wide Web transactions have not been lost on state treasury officials

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