Cigarette Smuggling Cuts States’ Per-Pack Tax Revenues

Over the pastdecade, almost every state has raised cigarette taxes, sometimes multiple times.The health benefits are undeniable, but the benefits to states’ revenues arenot as clear-cut.

In 2010, stateswith high tobacco taxes lost about billion in revenue because of cigarettesmuggling, according to the Bureau of Alcohol Tobacco Firearms and Explosives. Expertssay the number is climbing.

Most of the blackmarket in cigarettes is between low-tax states and high-tax states: Smugglerspurchase cigarettes in a low-tax state and transport them to a high-tax state.Then they sell them at a discount to smokers while still pocketing a healthyprofit. Because there is such a wide disparity among states’ cigarette taxes, theprice differential is well worth the risk of smuggling, according to lawenforcement officials.

Minnesota isthe latest state to hike cigarette taxes. The legislature this year more than doubledthe tax — from .23 apack to .83. Massachusetts is also in the throes of debating a cigarette taxhike that would increase state taxes by another dollar, to .51 a pack.

TheFederation of Tax Administrators, which keeps track of taxes in the 50 states,says all but three states —California, Missouri, and North Dakota —have raised their cigarette taxes at least once since 2000. These taxes vary widely,from a low of sh.17 in Missouri to a high of .35 in New York.

On top of thestate tax, New York City levies its own tax of .50 per pack—making the cityan attractive destination for smugglers.

“In the pastfew years, as taxes have gone up, you do notice it (the increase insmuggling),” said Charles Mulham, special ATF agent and public informationofficer in the New York office.

Mulham said smugglersusually drive down the eastern seaboard to Virginia, which has the second lowesttax in the country at 30 cents a pack, and pay to a carton. They loadup a U-Haul and return to New York City where cartons normally sell for each.

The smugglerssell them there for to a carton —half price to the smokers and without the tax collected. If they take apart thecartons and sell the contraband by the pack, the profit is even greater in acity where a pack goes for about , he said.

Geoff Gloak,spokesman for the New York State Department of Taxation and Finance, said thatNew York State cigarette tax collections have been steadily increasing the lastseveral years, to  .5 billion in 2012.He did not have an estimate on the revenue lost to the state through smuggling,but noted that enforcement efforts have picked up.

Others,however, estimate New York’s loss to be significant. According to a study by the Michigan-based MackinacInstitute for Public Policy, which studies cigarette smuggling, an estimated 60percent of the cigarettes consumed in New York were smuggled illegally into thestate, avoiding taxes. Michael LaFaive of the center estimated that the state could havelost as much as .8 billion in 2011 as a result.

Part of thereason smuggling is so lucrative is that the “price of doing business” for thesmugglers is low. Current penalties in New York are about a carton ifsmugglers are caught. In June, the penalty is scheduled to go up to acarton, under a bill signed into law by Gov. Andrew Cuomo.

In a 2008 study called “How Far to theBorder,” Stanford University professor Michael Lovenheim estimated that 13 percentto 25 percent of cigarette consumers bought their cigarettes in a cheaperjurisdiction than where they live. These smokers seek out “border localities” withlower taxes, such as other states, other countries or Indian reservations.

Prosecution of such “casual” smugglersis more difficult than tracking the big guys. The number of casual smugglersincreases with the amount of tax in the smuggler’s home jurisdiction and theproximity of a cheaper locale, he found.

Lovenheim estimated that 31 percent of smokers in NewJersey, which has a .70 a pack cigarette tax, engage in “casual smuggling,”while only.01 percent of smokers do so in California, where the tax is 87 cents.Maryland and the District of Columbia came in at 36 percent and a whopping 63percent, respectively, mostly because of their proximity low-tax Virginia –which, in many cases, is just over a bridge. Cigarette smuggling is soprofitable that it is even allegedly being used to fund terrorists. In mid-May,16 Palestinian men, some whom authorities said had ties to terrorists, werearrested in what police said was a million illegal cigarette smugglingscheme that spanned New York, Maryland, Delaware, Virginia and New Jersey.

Ray Kelly, New York City PoliceCommissioner, said the smuggling was discovered while the men were undersurveillance for alleged terrorism ties. “We discovered that individualswho were on our radar for links to known terrorists were engaged in a massiveraid on the New York Treasury in the form of cigarette tax avoidance,” Kelly said at the time.

In Minnesota, the .60 cigarette tax increase that will go into effect July 1 hasbeen hailed as a way to raise funds for a new stadium for the popular MinnesotaVikings football team, among other things. But Democratic Gov. Mark Dayton saidthe tax is also about health.

“I believe we want to make taxesfairer not more regressive, but it serves other purposes,” Dayton toldMinnesota Public Radio. Estimates were that the new taxwould raise million for the state over two years.

Mackinac’s LaFaive says the stateshouldn’t celebrate yet. He points to Michigan, which has a a pack cigarettetax, 11^th highest in the country, where smuggling was rampant afterthe taxes went up in the early 2000s. “Michigan saw a big spike in itssmuggling,” he said. “The tax went from 25 cents to 75 (at that time) cents apack. The state of Michigan quickly learned they needed to impose a tax stampon the cigarettes because of the massive smuggling.”

As for Massachusetts, where the issueis currently under debate, the Mackinac Institute wrote a letter to thelegislature in an attempt to point out what could be the unintendedconsequences of upping the cigarette tax, calling it a “lose-lose” proposition.In the letter, the Mackinac officials said that about 18 percent of the cigarettesconsumed in Massachusetts are smuggled. With the tax hike, the institutepredicted that would rise to 44 percent, rivaling New York. Massachusetts isexpected to make a decision on the cigarette tax by mid-summer.

“Overall, despite the tax rate increase, thestate will experience such an increase in smuggling that tobacco tax revenuesare projected to fall by just over 3 percent,” they wrote.