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TOBACCO BUSINESS
NOVEMBER/DECEMBER 2013
report in the
Chicago Daily Herald.
Officials stated in the article that some
confiscated cigarettes were carrying
Missouri tax stamps and also that
they recently confiscated 11,480 loose
cigarettes from a Chicago store and
imposed a $284,000 fine on the store
owner. Reportedly, all types of retailers
were targeted, including small gas
stations, nightclubs and big-box stores.
But there is more that can be done,
according to industry experts, and simply
raising taxes is clearly not going to do it.
“Study after study shows that attempts
to socially engineer behavior through
increased taxes produce a far different
outcome than intended, with the black
market being the main beneficiary,”
according to Lyle Beckwith, senior vice
president of the National Association of
Convenience Stores (NACS).
The challenge for federal tax policy
on cigarettes is to avoid feeding
black markets in high-tax states, to
shrink cross-state tobacco smuggling
operations, and to increase tobacco taxes
in those states where taxes have room
to grow without creating black markets,
according to Keith Humphreys, professor
of psychiatry at Stanford University. He
is in favor of a “creative tax policy” that
he outlined recently in a
Huffington Post
article
.
He first suggests that the federal
government could refund federal
tobacco taxes to any state that keeps its
own tobacco taxes within a particular
range. Then, high-tax states would reap
little net revenue from the part of their
tax that would be outside the specified
federal range because of the loss of the
federal tax rebate.
“This would give them an incentive to
stop further increases or even cut back,”
he wrote. “This could have the lamentable
effect of reducing the frequency of price-
driven smoking cessation, but those same
states would benefit in terms of shrinking
black markets. And, as for state revenue, a
state takes in far more money from a lower
tax that people actually pay than a higher
tax that is evaded 75 percent of the time.”
Humphreys concludes that the “rough
equalizing of price” across the country
would collapse the profits of cross-state
tobacco smuggling rings.
But beyond pricing and taxes, Lesnak
believes illegal operations need to be
exposed and shutdown; penalties need
to be increased. “The message has to be:
‘If you’re caught, you’re going to jail,’” he
wrote in
The Daily Caller.
He said the passage of the
Prevent All
Cigarette Trafficking
(PACT)
Act
in 2009
was “a step in the right direction,” but
it needs to be “much more aggressively
applied and implemented. Interstate and
state-to-local government enforcement
agencies need better cooperation and
coordination.”
On the federal level, he also believes
that the ATF, the Food and Drug
Administration (FDA), Tax and Trade
Bureau (TTB) and customs need the
“resources to do their jobs” and “a clear
mandate from their leadership that
targeting these criminal organizations is
a priority.”
TB
A Smuggler’s Paradise—The Top 10
New York
Arizona
New Mexico
Washington Rhode Island
Wisconsin
California
Texas
Utah
Michigan
70%
60%
50%
40%
30%
20%
10%
0%
The top 10 cigarette smuggling rates (the percentage
by which cigarettes consumed in the state were
smuggled into the state) in the nation naturally
belong to states with some of the highest cigarette
excise tax rates.
Source: The Mackinac Center for Public Policy, 2013
60.9%
54.4%
53%
48.5%
39.8%
36.4%
36.1%
33.8%
32%
29.3%
Smuggling Rate
