NEW YORK (AP) — The big cigarette tax increases that many states are instituting to balance their out-of-whack budgets are raising fears that the trend will make black-market smokes more profitable and lead to more cigarette smuggling.
Cigarettes have been smuggled for generations, and the practice costs states untold billions in lost tax revenue.
Criminal gangs stock up in low-tax states like Virginia and Missouri, truck the cigarettes north and resell them illegally in high-tax states like Michigan and New Jersey. Others buy cartons of tax-free smokes on Indian reservations and sell them elsewhere. Buyers order untaxed cartons of murky origin on the Internet. Ships arrive from China carrying cargo containers filled with counterfeit cigarettes.
Law-enforcement officials and others worry that the widening price spread between taxed and untaxed cigarettes will only make the situation worse.
Phillip Awe, the chief tobacco law enforcer for the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), said the agency has taken notice. ATF is refining its national strategy for fighting cigarette trafficking, he said, and has substantially expanded its investigations, opening about 700 cases in the past five years.
“There are truckloads of cigarettes that are being transported across state lines right now,” he said, “all for the sake of exploiting the difference in the tax rates.”
Fourteen states have raised tobacco taxes in the past two years, according to the Tobacco Merchants Association, an industry group. With the economy in a slide, legislation pushing increases is pending in 19 other states. They include a proposed 50-cent increase in South Carolina, where the current 7-cent tax is the nation’s lowest.
New York state is raising its tax from its current $1.25 to $2.75 a pack, the highest in the nation. New York City charges an additional $1.50, which will adjust the cost of a typical pack of cigarettes here to $9.
Arthur Katz, executive director of the New York State Association of Wholesale Marketers and Distributors, which represents tobacco dealers, said the changes are certain to drive greater numbers of smokers to underground sources for their cigarettes.
“You’d have to be crazy to go and buy cigarettes at the store at almost $9 per pack,” Mr. Katz said.
Reservation shops and other sources of tax-free cigarettes could be primed to accrue even more business from smugglers.
Cigarettes are sold tax-free on tribal lands in New York state, a status that has been exploited for years by crooked entrepreneurs who resell the packs as far away as the Midwest and Canada. Indian reservations in New Mexico, Oklahoma and other states also have had trouble with smuggling.
Places such as New York’s Poospatuck Indian Reservation have become major sources of contraband cigarettes. Hidden away in a nondescript suburb on eastern Long Island, it is a 60-mile haul from New York City. But to bootleggers, the trip is worth it.
The reservation sold 10.4 million cartons of cigarettes last year, enough to supply every smoker in New York City with a pack a day for 3½ months. One store grossed an average of $35 million per month, federal agents said.
Rules regarding cigarettes sold on Indian reservations vary from state to state, but in general, buyers may not purchase huge quantities of low-tax or untaxed reservation cigarettes and resell them elsewhere without paying a state tax.
Smugglers also have long used counterfeited cigarette-tax stamps to disguise packs on the black market. New York state officials announced Wednesday that they seized $6.1 million worth of fake stamps from a Jordanian tobacco distributor.
Illegal cigarettes can put a big dent in state budgets. California officials estimate that taxes go unpaid on about 15 percent of all tobacco sold in its markets, at a cost of $276 million per year. New York put its losses at more than $576 million in a study released in 2006.
Congress is considering bills that would increase the penalties for smuggling, bar the shipment of cigarettes through the mail and require all tobacco products to carry a high-tech federal tax stamp that would enable law-enforcement officials to spot counterfeits and identify packages that have illegally crossed state lines.
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