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State Cigarette Restrictions Fuel Burgeoning Black Market

By: Michael Pelzer - @MichaelPelzer1 - Feb 17, 2015, 12:08 pm

The health risks of regular cigarette smoking are well known. But a report released on February 6 by the Tax Foundation asserts that over-regulation of nicotine products can also have a negative effect on the economy, stimulating a thriving black market at the expense of taxpayers.

The paper from the Washington, DC-based think tank finds that widely varying cigarette prices between states — in some cases one-third the price of those sold across neighboring state lines — provide a golden opportunity for smugglers, who hop over borders to low-tax jurisdictions, bringing back hundreds of cartons for resale to cost-cutting smokers.

Smoking is the leading preventable cause of death in New York City, despite having the highest state taxes on cigarettes. (PublicDomain)

The incentives for this illicit market are substantial. According to one store owner in New York City (home to the highest cigarette tax rates in the nation) cited in the report, “a friend makes a weekly trip to North Carolina with US$100,000, loads up on cigarettes, then returns to New York. He makes a million dollars a year.”

Authorities have responded not by harmonizing or reducing regulatory burdens, but by “banning common carrier delivery of cigarettes, greater law enforcement activity on interstate roads, and cracking down on tribal reservations that sell tax-free cigarettes.”

The illicit trade in cigarettes takes other forms beside simple smuggling, ranging from counterfeit brands and tax stamps to theft and corruption, writes the Tax Foundation, suggesting that the illicit market for smokes is in turn financing a number of criminal activities.

According to the head of the US Alcohol, Tobacco, Firearms and Explosives (ATF) tobacco division, states are losing roughly $5 billion a year as a result of cigarette smuggling.

Smoking Out the Smugglers

The report suggests states with the highest tax rates inevitably have a higher smuggling rate. It uses New York as one of the primary examples, with as many as 58 percent of cigarettes being smuggled illegally. The Foundation also suggests that “smuggling rates generally rise in states after they adopt large cigarette-tax increases.”

The United States Department of Justice has previously echoed such findings, noting that “the incentive to profit by evading payment of taxes rises with each tax rate hike imposed by federal, state, and local governments.”

Of the 31 states who increased cigarette taxes since 2006, 19 states saw an increased smuggling rate. Smuggling rates did drop in some states, however this was often seen “where neighboring states have higher cigarette tax rates,” suggesting that racketeers simply move their activities to more profitable jurisdictions.

The Tax Foundation report also argues that “high cigarette taxes … amount to a ‘price prohibition’ of the product in many US states,” hitting the poorest smokers hardest.

State authorities such as New York contend that the price increases are designed to curb the leading cause of preventable death, noting that the “number of daily adult smokers in New York City has dropped from 1.3 million in 2002 to 850,000 in 2012.”

But as the report suggests, this reduction has likely had unforeseen knock-on effects, stimulating illicit economies across state lines and handing easy profits to underground criminals.

Edited by Laurie Blair.

Michael Pelzer Michael Pelzer

Michael Pelzer is a New York native and PanAm Post intern currently living in Honduras. Michael primarily focuses on security and defense issues in Latin America and the United States. Follow @MichaelPelzer1.