NCPA - National Center for Policy Analysis

Highly Taxed Cigarettes Create New Underground Market

April 19, 2011

A recent wave of state tobacco tax increases, designed to pump revenue into cash-strapped local governments, is inspiring an increasingly dangerous cigarette smuggling industry where big profits lure violent criminal gangs and drug traffickers into the booming illegal market, according to law enforcement officials and court records, reports USA Today.

Larry Penninger, acting director of the tobacco diversion unit of the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), says investigations and prosecutions involving tobacco trafficking have been increasing as smugglers flood high-tax states with cigarettes from low-tax states.

  • From 2007 to 2010, 27 states raised their cigarette taxes, according to Michigan's Mackinac Center for Public Policy.
  • There is so much illicit money to be made, Penninger says, that some drug and weapon trafficking organizations are adding tobacco to their product lines to boost profits.
  • For example, in low-tax states such as Virginia, where cigarettes cost about $4.50 a pack, smugglers can sell a truckload (typically 800 cases) in New York at $13 a pack.
  • New York is the highest tobacco taxing jurisdiction in the country.

Smuggling costs states and the federal government about $5 billion, according to U.S. government estimates.  Last year, the ATF reported 357 open cases involving tobacco smuggling, compared with a handful a decade earlier.

Source: Kevin Johnson, "Violent Criminals Expand into Cigarettes," USA Today, April 18, 2011.

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