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Commercial smuggling is a large-scale criminal activity that can involve counterfeit state tax stamps, counterfeit versions of legitimate brands, and moving prohibited products.[14] The Mackinac Center provides several anecdotes of smuggling activity over the many editions of its report, including a prison guard caught smuggling cigarettes into prisons, a Maryland police officer running illicit cigarettes while on duty, and a Virginia man hiring a contract killer over a cigarette smuggling dispute.[15] Cigarette Smuggling Costs State Governments Billions of Dollars Each Year The inbound flow of cigarettes not appropriately taxed by California and New York cost each state roughly $1.3 and $1 billion, respectively, each year in lost revenue

An instrument is required to be correlated with the endogenous variable but not the error term in the outcome equation (for detailed presentation of this method, see any econometric textbook, e.g., [25])