Cigarette taxes

Posted: Jul 18, 2002 12:00 AM
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 small-time smugglers. 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 them. 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.