Smugglers take Advantage of Differing Tax Rates on Cigarettes, May Fund Terrorists

According to a recent Stateline article, while the health benefits of state cigarette taxes are “undeniable,” the impact on state revenues is less clear cut. A main contributor to this murkiness is the fact that smugglers (both dedicated and casual) are taking advantage of differing state tax rates on cigarettes. Because the tax differential can be quite wide between various states, smugglers are able to buy cigarettes at a cheaper rate in a low tax state, drive to a high tax state and sell it at below “market value” and pocket a profit. Charles Mulham, an ATF agent and New York public information officer, told Stateline that "in the past few years, as taxes have gone up, you do notice it (the increase in smuggling)”.

Check out this related CSG analysis: State-by-State: Cigarette Taxes

Another factor leading to an increase in interstate cigarette smuggling: the price of getting caught smuggling is relatively low. For example, in New York, the penalty for smuggling cigarettes is currently $150 - something that smugglers just consider the cost of doing business. However, Governor Cuomo has recently upped the ante, signing a bill that will move that penalty up to $600 dollars a carton in June. All this smuggling has lead to some staggering loss of potential revenue. The Michigan-based Mackinac Institute for Public Policy estimates that approximately “60% of cigarettes consumed in New York is smuggled,” and the revenue loss could be as high as 1.8 billion dollars a year.

Even harder to catch the “dedicated smuggler” is the “casual smuggler”. This person usually lives in near proximity to a low tax locality and thus goes there on the weekends to buy some cigarettes and bring some back to the higher taxed area of residence. Stanford University professor Michael Lovenheim (in a 2008 article entitled “How Far to the Border?”) calculates that 13 to 25 percent of smokers are the “casual smugglers”.

Finally, there may be some evidence that at least some of the profits made off of cigarette smuggling is winding up in the hands of terrorists. According to Ray Kelly (the chief of police of New York City), the police discovered a massive smuggling operation while tracking 16 Palestinian men with alleged ties to terrorists that amounted to 55 million dollars.

Ultimately, the wide gap between states' cigarette taxes is leading to a rise in cigarette smuggling and a situation where, according to the Mackinac Institute (in a letter to Massachusetts) “…despite the tax rate increase, the state will experience such an increase in smuggling that tobacco tax revenues are projected to fall…”. More troublingly, some of that profit may wind up in the hands of terrorists.