Up In Flames: Cigarette Taxes Create Opportunity For Revenue And Crime

From: Forbes

Kelly Phillips Erb

She might not have looked like a criminal but I could tell she was up to no good the minute she opened her mouth. And when she handed me her New Jersey driver’s license, it confirmed my suspicions. Nobody buys that many cartons of cigarettes with an out of state ID to merely take them back to their beach house and smoke. She was planning on smuggling those cigarettes across state lines. So I did exactly what any other teen-aged sales clerk would do: I rang her up and sent her on her way.

I’ll bet I did that over a hundred times in the course of my retail stint at a certain big box pharmacy. The pharmacy in question was located at the intersection of two major roadways, one of which was a straight shot up north from the Grand Strand: Myrtle Beach, South Carolina. I lived and worked just over the border.

It’s over 500 miles from the beaches of North Carolina to the central New Jersey. Another 50 miles or so will get you across the border into the Empire Empire State, New York.

But in terms of taxation, the states are even further apart. Today, a pack of cigarettes will cost you an additional $1.01 in federal taxes no matter where you make your purchase. But if you buy your cigarettes in North Carolina, the state will tack on a mere 45 cents in tax per pack (report downloads as a pdf); that’s a little more than a dime cheaper than in neighboring South Carolina. As you drive north, however, the scene changes dramatically. A pack of cigarettes will be slapped with a state tax of $2.70 in New Jersey and a whopping $4.35 in New York ($5.85 in New York City). Federal, state and local taxes now account for nearly half of the cost of the average pack of cigarettes. And those dollars add up: the difference between buying a carton (that’s 10 packs) of cigarettes in North Carolina versus New York City is $54.00.

Those kind of numbers can tempt almost anyone. And it feels like it would be so simple: you can walk right into a store in a low tax state and walk out with a few cartons. But how much you buy and what you plan to do with those cartons can be the difference between saving a few dollars and committing a crime.

Under the Contraband Cigarette Trafficking Act, enacted in 1978, it is a felony for any person to ship, transport, receive, possess, sell, distribute, or purchase more than 60,000 cigarettes (3,000 packs) “that bear no evidence of state cigarette tax payment in the state in which the cigarettes are found if the state requires a stamp to be placed on cigarette packages to demonstrate payment of taxes.” The Act was changed in March 2006 as part of the PATRIOT Act (I kid you not); the threshold is now just 10,000 cigarettes (500 packs or 50 cartons) per month.

Despite the laws in place to stop the behavior, the potential for making money is practically unlimited. The ATF (Bureau of Alcohol, Tobacco, Firearms and Explosives) figures that solely by purchasing cigarettes in a low tax state and reselling them in a high tax state, a seller can make a profit (report downloads as pdf) up to $23,000 on 10 cases of cigarettes – that’s considered a car load. Profits go up to $90,000 on 50 cases for a van load and finally, up to $465,000 for 200 cases for a small truck load. It’s no wonder then, that in 2011, more than 60% of all cigarettes sold in New York were smuggled in from another state. And while New York may be dramatic because of its ultra-high tax rate, fifteen states have smuggling rates of more than 20%.

Smuggling cigarettes is so prevalent that the ATF has singled out illegal cigarettes are the number one black market commodity in the world. In the United States, federal and state governments estimate that tobacco diversion costs over $5 billion in revenue from unpaid excise taxes annually; the loss in New York state alone is pegged at as much as $1.8 billion. The World Health Organization (WHO) Framework Convention on Tobacco Control estimates that the global impact of cigarette smuggling is between $40 billion and $50 billion each year.

And while it’s tempting to think that smuggling is something that happens only in organized crime or as part of some seedy underworld, think again. The eastern seaboard (Highway 17 and Interstate 95, in particular) is a busy corridor for cigarette smuggling. Individual sellers and “mom and pop” stores can easily move tens of thousands of dollars in cigarettes up and down the coast with hardly any notice. And if they do get caught? In most cases, it’s not the end of the world. The criminal penalties are far less than those involving the smuggling of drugs and, in some instances, can result only in a fine.

Cigarette smuggling is so profitable and so easy to do that the proceeds are now being used to fund other criminal activities, including terrorism. High profile arrests in North Carolina, Michigan and New York over the past decade have provided evidence that profits from cigarette smuggling were being diverted to fund terrorism; in at least one case, the smuggler was paying for individuals to train with al-Qaeda.

If taxes are what is driving the bad behavior (smuggling), what’s the answer? Eliminate the taxes? That would, public health advocates claim, simply encourage a different kind of bad behavior (more smoking). Are we willing to accept one at the cost of another?

It’s a question that is bound to come up again – not because of concerns about smuggling or smoking but because of sequestration (stay with me on this one). Earlier this year, President Obama proposed an increase in federal cigarette taxes by 94 cents a pack to finance an expansion of preschool education. The hike was announced as part of the $3.8 trillion budget for the next fiscal year. But the proposal fizzled nearly as quickly as it was introduced. That was, however, a few months ago. This week, we learned that nearly 57,000 children would be affected by cuts to the federal HeadStart program for the coming school year. The cuts are reportedly as a result of budget-balancing efforts due to the sequester; HeadStart was subjected to a 5.27% reduction to its $8 billion in funding. Protests against the cuts are planned for cities across the country. Now, maybe we’ll find that the boost in federal cigarette taxes isn’t off the table after all.

The bottom line is that our relationship with cigarette taxes (and indeed, other sin taxes) is an awkward one. As a society, we have come to rely on the revenue those taxes generate but haven’t yet figured out how to deal with the fact that taxing certain behaviors – especially those that are addictive – can offer up mixed results. In the case of cigarettes, even as data suggests that higher taxes reduces the rates of smoking, it also creates an enormous black market, making it profitable for those willing to break the law.

Not everyone is comfortable with the idea of using a boost in cigarette taxes as a means to fill budget gaps. In addition to the obvious concerns about funding programs for children on the backs of smokers, there is a real concern about whether the benefit of increased revenue is worth the potential risks. Just last month, Patrick Donoho, president of the Maryland Retailers Association, offered up a scathing critique of the proposal, noting, “The president’s education initiative is a great idea — funding it with unpredictable taxes is not.”


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