National Center for Policy Analysis

BRIEF ANALYSIS No. 423 For immediate release: Wednesday, October 30, 2002

Every day, residents of Maryland ($1 tax) and the Cigarette Smuggling District of Columbia (65 cents tax) technically engage by Bruce Bartlett in smuggling by buying cigarettes in Virginia. Al- though interstate cigarette smuggling is a crime, pros- Diverse state tobacco taxes are a key reason for ecutions are rare. cigarette smuggling, in which organized crime and terrorist groups increasingly are involved. A July 21 The Role of Organized Crime and Terrorism. article in the Detroit News quoted John D’Angelo of On June 1, the Washington Post reported that the Bureau of Alcohol, Tobacco and Firearms (ATF) Maryland’s cigarette tax increase from 66 cents to $1 as saying, “There is no doubt that there’s a direct led to an immediate jump in smuggling. It said that “a relationship between the increase in a state’s tax and vast and burgeoning underworld of criminals” is now an increase in illegal engaged in the business: trafficking.” State Cigarette Tax per Pack, 2002 “Criminals who once The Profit in Smug- dealt exclusively in ille- gling. According to the State Tax Rate State Tax Rate gal drugs are now smug- Federation of Tax Ad- New Jersey $1.50 U.S. Median $0.41 gling cigarettes be- New York $1.50 Iowa $0.36 ministrators, so far this Washington $1.43 Nevada $0.35 cause it is so lucrative year 17 states have Rhode Island $1.32 Nebraska $0.34 and punishments gen- raised their cigarette Connecticut $1.11 Florida $0.34 erally are much less taxes in an effort to Alaska $1.00 South Dakota $0.33 severe.” Hawaii $1.00 Arkansas $0.32 cover their budget defi- Maine $1.00 Pennsylvania $0.31 For years, police cits. The magnitude of Maryland $1.00 Idaho $0.28 have warned of orga- the increases is remark- Illinois $0.98 Delaware $0.24 nized crime’s move into able. Vermont $0.93 Louisiana $0.24 California $0.87 Oklahoma $0.23 cigarette smuggling. ■ On January 1, 2002, Wisconsin $0.77 New Mexico $0.21 The criminal gangs have the median state Massachusetts $0.76 Colorado $0.20 brought experience cigarette tax rate was Michigan $0.75 Mississippi $0.18 Kansas $0.70 Montana $0.18 from the drug trade, 34 cents per pack Utah $0.70 Missouri $0.17 economies of scale and and the average was Oregon $0.68 West Virginia $0.17 other efficiencies to 45 cents. District of Columbia $0.65 Alabama $0.17 cigarette smuggling. Arizona $0.58 Tennessee $0.13 ■ In six months, the Indiana $0.56 Georgia $0.12 For example, they can median rose to 41 Ohio $0.55 Wyoming $0.12 counterfeit tax stamps, cents and the aver- New Hampshire $0.52 South Carolina $0.07 something small-time Minnesota $0.48 North Carolina $0.05 smugglers cannot do. age to 54 cents. North Dakota $0.44 Kentucky $0.03 ■ By contrast, 10 years Texas $0.41 Virginia $0.03 Terrorists, too, are ago both the median Note: Rounded up to nearest cent. smuggling cigarettes to and average were 25 Source: Federation of Tax Administrators. finance their operations cents. — not surprising since New York and New Jersey have the highest state they are tightly organized, highly disciplined and expe- tax rates, $1.50 per pack. New York City imposes an rienced in smuggling weapons and explosives. A additional tax of $1.50, for a total tax of $3.00 per pack. March 10 San Francisco Chronicle story entitled At the other end of the spectrum, North Carolina’s tax “Terrorists Mimic Crime Syndicates to Fund Attacks” is just 5 cents per pack, Kentucky’s is 3 cents and detailed the involvement of many groups in smuggling. Virginia’s is 2.5 cents. [See Figure I.] “More and more, terrorists are acting like traditional It is easy to buy a truckload of cigarettes in North organized crime groups, engaging in rackets like ciga- Carolina and sell them in New York City for a profit of rette and fuel smuggling,” the Chronicle reported. almost $30 per carton. Thus a few hours’ “work” can Indeed, it said terrorists are working alongside orga- yield several thousand dollars’ profit. nized crime. Dallas Headquarters: 12655 N. Central Expy., Suite 720 • Dallas, TX 75243-1739 • 972/386-6272 • Fax 972/386-0924 Washington Office: 655 15th St. N.W., Suite 375 • Washington, DC 20005 • 202/628-6671 • Fax 202/628-6474 For more information: Sean Tuffnell in Dallas at 972/386-6272 or Greg Scandlen in Washington at 202/628-6671 BRIEF ANALYSIS No. 423 Page 2

The Irish Republican Army has long been impli- gent, the ATF can do only so much. The authorities cated in cigarette smuggling in Europe. Recently, a cannot even keep cigarettes from being smuggled into member of Hezbollah was convicted of running a prisons. multimillion-dollar smuggling operation out of North Consequences of High Tobacco Taxes. The Carolina. The Washington Post quoted Maryland growth of cigarette smuggling is a key reason why State Comptroller William Donald Schaefer as saying, cigarette tax revenues are not keeping pace with tax “We know that some of the money used by smugglers increases. Between 1992 and 2000, the average state is directly passed on to terrorist organizations.” cigarette tax rate increased 64 percent while gross On September 28, the Los Angeles Times reported state tax revenues rose only 35 percent. [See Figure that federal authorities have been probing western II.] The apparent fall in smoking rates over this period New York for evidence of cigarette smuggling as a was not nearly enough to account for the revenue source of Al Qaeda fund- shortfall. This suggests that ing. One smuggling scheme Increase in State states expecting higher rev- involving several local Arab enues from recent cigarette Americans was broken up Cigarette Tax Revenues and tax increases may never see in 1999, said the Times. Average Tax Rate, 1992-2000 them. Smuggling via the Even liberal groups like Internet. The Internet sim- the Center for Budget and plifies smuggling. Cigarettes 64% Policy Priorities (CBPP) from Indian reservations, now warn states against ex- where state cigarette taxes pecting too much revenue are not collected, are often from higher cigarette taxes. available online. The pur- The CBPP also is concerned chaser pays by credit card, 35% that the poor, who smoke in and the cigarettes are deliv- higher numbers, may be ered to his or her home. unduly burdened. It sug- The Jenkins Act requires gests a tax rebate to low- vendors to report to the income smokers. Of course buyer’s state tobacco tax that would only make it administrator when ciga- Tax Rate Revenues easier for them to afford rettes are sold across state Source: Agriculture Department, Federation of Tax cigarettes. lines. However, many Administrators. Another problem is that Internet vendors do not re- as cigarette distribution port the sales. An August 9 General Accounting moves out of normal outlets and into criminal chan- Office report concluded that transferring primary nels, controls on cigarette purchases by minors erode. investigative jurisdiction from the Federal Bureau of Not only does this potentially increase smoking by Investigation (FBI) to the ATF would give the latter teen-agers, but it brings more of them into contact with comprehensive authority to enforce the Jenkins Act dealers pushing stronger drugs. and should result in better enforcement. As much as politicians and antismoking zealots Adding Jenkins Act enforcement responsibility to hate to admit it, there are limits to how much states can its authority under the Contraband Cigarette Traffick- tax tobacco. At some point, they may have to admit ing Act may increase the likelihood that the ATF will that high cigarette taxes are even more harmful than detect and investigate violators and that U.S. attor- smoking. neys will prosecute them. Yet so long as tobacco Bruce Bartlett is a senior fellow with the Na- products are legal and state cigarette taxes are diver- tional Center for Policy Analysis.

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