NCPA - National Center for Policy Analysis


May 8, 2008

On April 23, New York Gov. David Paterson signed into law a $1.25 per-pack tax hike on top of the state's $1.50 per-pack tax, in addition to New York City's own $1.50 per-pack tax.  Come July 1, New York City's smokers will be paying on average $9 a pack for legal cigarettes, says Patrick Fleenor, a chief economist of the Tax Foundation.

But if history is any guide, most cigarettes sold will actually be trucked up from Virginia, or shipped in from China, by "butt-leggers" who can make over $1 million on each tractor-trailer load of smuggled smokes:

  • The problem first surfaced during the Great Depression, but tax hikes in the early 1960s created a major profit opportunity for smugglers and kicked the epidemic into high gear.
  • By 1967, a quarter of the cigarettes consumed in the Empire State were bootlegged and New York City's finance administrator labeled cigarette smuggling the principal stoking facility of the engine of organized crime.
  • Crime spread beyond New York, as trucks carrying cigarettes across the country were hijacked and businesses selling them robbed to supply New York's black market.

Today, city and state records of tax-paid cigarettes show sales plummeting, despite stable smoking rates.  This signals the resurgence of smuggling and large-scale tax evasion, says Fleenor.

Traditional organized crime, terrorist groups and street gangs are involved.  Rivalry among these groups has resulted in numerous shootings and homicides, according to the Bureau of Alcohol, Tobacco and Firearms.  Indeed, the connection to terrorism is no exaggeration, says Fleenor:

  • When New York police cracked another smuggling ring in 2005, they uncovered a multimillion dollar flow of funds from New York City to unknown individuals in the Middle East.
  • Just a few weeks before that 2005 bust, Buffalo-area businessman Aref Ahmed had used the racket to fund "scholarships" at terrorist training camps in Afghanistan during the spring of 2001.
  • Going back to 1993, counterfeit cigarette stamps were found in the apartment of the first World Trade Center bombers.

Source: Patrick Fleenor, "Cigarette Taxes Are Fueling Organized Crime," Wall Street Journal, May 7, 2008.

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