A new report from the Federation of Tax Administrators shows
that 17 states have raised their cigarette tax rates so far this year. These
increases will exacerbate an already serious interstate smuggling problem,
which has been linked to terrorist activity. They will also further burden
the poor, who are principally impacted by cigarette taxes.
The magnitude of the recent cigarette tax increases is truly
remarkable. On Jan. 1 of this year, the median state cigarette tax rate was
34 cents per pack and the average was 45 cents. In just 6 months, however,
the median has risen to 41 cents and the average to 54 cents. By contrast,
10 years ago both the median and the average were only 25 cents.
The highest state tax rate is now $1.50 per pack, in both New
York and New Jersey. However, New York City imposes an additional tax of
$1.50, for a total tax of $3.00 per pack there. At the other end of the
spectrum, North Carolina imposes a tax of just 5 cents per pack, Kentucky's
tax is 3 cents, and Virginia is lowest at 2.5 cents.
It is a very easy matter, therefore, to buy a truck full of
cigarettes in North Carolina and sell them in New York City for an easy
profit of almost $30 per carton. A few hours work can easily net someone
several thousand dollars profit at almost no risk.
Every day, thousands of those living in Maryland ($1 tax) and
the District of Columbia (65 cents tax) technically engage in smuggling by
buying a few cartons of cigarettes in Virginia. Although interstate
smuggling of cigarettes is a crime, only the tiniest fraction of contraband
cigarettes are ever detected by authorities.
For some years, police have warned that organized crime was
moving heavily into the cigarette smuggling business. This has tended to
increase the quantity of contraband cigarettes, as established criminal
gangs bring experience from the drug trade, economies of scale and other
efficiencies to the cigarette-smuggling business. For example, they are now
able to counterfeit tax stamps -- something beyond the capability of
There is also evidence that terrorists are engaging in cigarette
smuggling to finance their operations. The Irish Republican Army has long
been implicated in cigarette smuggling in Europe. And just last month, a
member of the militant group Hezbollah was convicted of running a
multimillion dollar smuggling operation out of North Carolina. Maryland
Comptroller William Donald Schaefer has said that there is evidence of
similar operations in his state.
It is often said that police should step up enforcement of
anti-smuggling laws. However, as long as tobacco remains a legal product and
there is a wide divergence in state tax rates, there is a severe limit on
what they can realistically do. The authorities can't even keep cigarettes
from being smuggled into prisons, where smoking is banned.
Smuggling is simplified by use of the Internet. Low-tax
cigarettes are often available there from Indian reservations, where state
cigarette taxes are not collected. You pay with a credit card, and they are
delivered directly to your house.
The vast growth of cigarette smuggling is a key reason why
cigarette tax revenues are not keeping pace with tax increases. Between 1992
and 2000, the average state cigarette tax rate increased by 64 percent.
However, gross state tobacco tax revenues only rose by 35 percent. Although
smoking rates probably fell over this period, it was not nearly enough to
account for the shortfall in revenue. This suggests that states expecting
higher revenues from recently enacted cigarette tax increases may never see
Even liberal groups like the Center on Budget and Policy
Priorities are now warning states against expecting too much revenue from
higher cigarette taxes. The CBPP is also concerned that those with low
incomes, who tend to smoke in higher numbers than those with high incomes,
may be unduly burdened. It suggests that some sort of tax rebate to low
income smokers be instituted. Of course, that would only make it easier for
them to afford cigarettes.
Another problem is that once cigarette distribution moves out of
normal outlets and into criminal channels already well established by the
drug trade, controls on cigarette purchases by minors will erode. Not only
will this increase smoking by teen-agers, but it will also bring more of
them into contact with drug dealers pushing stronger stuff.
As much as politicians and anti-smoking zealots hate to admit
it, there are limits to how much states can tax tobacco. At some point, they
may have to admit that the spillover consequences of high cigarette taxes
might be worse than the effects of smoking.