Smuggled Tobacco: Straining States' Bottom Lines

For every two packs of cigarettes sold in New York, at least one has been illegally smuggled into the state. That’s according to research by the Mackinac Center for Public Policy, which also reports that cigarette smuggling cost states an estimated $5.5 billion in lost revenue in 2012.
“The significance of the problem cannot be overstated in high-tax states,” said Michael LaFaive, director of the Morey Fiscal Policy Initiative at the Mackinac Center.
New York has both the highest rate of smuggled cigarettes in the country and the highest cigarette tax—at $4.35 per pack—but it isn’t the only state to be affected by smuggling.
“The areas with the greatest smuggling problems are those with the highest excise taxes, particularly those near lower-taxed states, as with New York and Virginia,” said LaFaive.
In Virginia, where the 30-cents per-pack tax rate is one of the lowest in the country, cigarette smuggling out of the state has caught the attention of policymakers and law enforcement.
“State policymakers should take seriously the threats posed by the illicit cigarette trade,” said Stewart Petoe, director of legal affairs for the Virginia State Crime Commission. “Not only does it impact state revenues, for both importer and exporter states, but the enormous profits generated by this black market, comparable only to the drug trade, create collateral problems for states; organized criminal gangs soon enter the picture, bringing with them a host of problems.”
Virginia has experienced many of these problems firsthand as the state became a prime source for illicit cigarettes to northern states in the past four years.
“Robberies, burglaries and several homicides have been linked to cigarette smuggling groups operating in Virginia,” said Petoe.
To facilitate the purchase of their cigarettes and to launder money, gangs have created false businesses in Virginia, creating more problems for law enforcement, said Petoe.
“In response, Virginia became the first state in the nation to criminalize the smuggling of tax-paid cigarettes,” he said.
Virginia has taken additional steps to curb the illicit trade of cigarettes and help law enforcement and prosecutors do their jobs.
“We have worked to provide education and training to law enforcement, prosecutors, members of the legislature and judges on the seriousness of this crime,” said Kristen Howard, executive director for the Virginia State Crime Commission. “In addition, we have modified various criminal procedure statutes to assist prosecutors in combatting cigarette trafficking rings.”
In Rhode Island, which has the third-highest cigarette tax rate in the country, policymakers have seen firsthand the problems that can accompany smuggled cigarettes.
“Evidence suggests that many criminals are moving away from traditional activities like illegal drugs, firearms and prostitution and shifting to illegal tobacco trade as a means to finance criminal enterprise,” said Rhode Island Sen. Ryan Pearson, who sponsored legislation earlier this year to stop the illicit trade of cigarettes in his state. “This trend has occurred because tobacco smuggling is lucrative and the penalties for smuggling tobacco are lenient in most states. These factors make illicit tobacco trade a low-risk crime.”
Pearson believes state lawmakers should take notice—and action.
“We should pass more stringent laws and impose significant fines and penalties that could serve as a deterrent to this illegal activity,” he said. “This is about the state’s bottom line. These criminals are skirting sales tax laws and placing a deeper burden on other industries and those who follow the law.”
LaFaive, Howeard, Petoe and Pearson are four of the speakers at a roundtable discussion about how the illicit trade of cigarettes is affecting states during CSG’s Annual Conference in Anchorage, Alaska, from 11 a.m. to noon on Sunday, Aug. 10.
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