| Title: Hiking Cigarette Taxes Is Good for (Illegal) Business Posted: June 23, 2005 Published: June 23, 2005 Source / Author: By Bruce Bartlett (NY Times) Derived From: New York Times Hiking Cigarette Taxes Is Good for (Illegal) Business By Bruce Bartlett (NY Times) In their rush to lay hundreds of billions of dollars in new taxes on the tobacco industry, congressmen have given little attention to a likely unintended consequence: an increase in cigarette smuggling. Interstate cigarette smuggling is already one of the fastest-growing crimes in the U.S., spurred on by big differences in state tax rates -- ranging from $1 per pack in Alaska to a few cents in Virginia, North Carolina and Kentucky. Recent increases in state and federal cigarette taxes have also led to increased smuggling across the Mexican border. Any further increase could raise smuggling to epidemic levels, such as already exist in Canada, Europe and Asia. Canada's smuggling problem arose after a huge increase in cigarette taxes in 1991. By 1994 smuggling had reached crisis proportions, and the federal government and some provincial governments were forced to cut their tax rates to make smuggling less lucrative. However, not all provinces cut their taxes, leading to a sharp increase in interprovincial smuggling. A carton of cigarettes can be bought for 26.40 Canadian dollars (US$18.50) in Ontario and resold illegally for C$48.55 in British Columbia or C$50.62 in Newfoundland. Smugglers often operate through toll-free phone numbers and e-mail, delivering their goods through commercial courier services. The British Columbia government estimates that it loses as much as C$125 million per year from smuggling. In Britain, the port of Dover has been the center of smuggling activity, taking advantage of France's lower tobacco taxes. With routine inspections for travelers returning from France having ended in 1993, many criminals discovered that cigarettes were cheaper and easier to smuggle than drugs. A trunk full of contraband cigarettes purchased in France could be sold in England for a profit greater than could be earned by smuggling 20 pounds of marijuana. The extent to which smuggled cigarettes circulate is shown by the fact that Drum, a Dutch brand, has come to command 13% of the British market, even though that brand is not sold legally in Britain due to a trademark dispute. Sales of illegal cigarettes were estimated in 1995 at 50% of the British market, costing the government almost $600 million in lost tax revenue. In Italy, contraband cigarettes are estimated to hold 20% of the market; two criminal gangs are said to make $600 million a year between them in profits from cigarette smuggling. In Spain, illegal cigarettes are estimated at 23% of the market and rising rapidly as the result of Spain's 55% tax rate on tobacco. Contraband sales there are estimated at more than $1 billion annually. In Germany, where taxes account for some two-thirds of the cost of cigarettes, sales of illegal cigarettes cost the government at least $600 million a year. Polish criminal organizations are said to control the smuggling trade, and the poorer citizens of eastern Germany are the main customers. Neighboring Austria also has a major problem with cigarette smuggling due to its 56% tax rate. One entrepreneur even figured out how to open a store in a narrow "no man's land" between the Austrian and Czech borders, where he was able legally to sell tax-free cigarettes. Although the Austrian government tried to shut him down, Czech authorities refused to cooperate. The government has since restricted the number of cigarettes Austrians may bring back with them from the Czech Republic, Hungary, Slovakia and Slovenia and increased efforts to assess duties. Sellers have responded by lowering prices, thus increasing the profit for smuggling and thwarting the government's enforcement efforts. Europe's contraband increasingly originates in Yugoslavia. Because of trade embargoes against Belgrade for its attacks on Bosnia, the government became involved in the smuggling trade to obtain arms and other commodities. Now it is an organized, sanctioned business, with cigarettes arriving daily by air from Russia, Ukraine and elsewhere, to be transshipped to Italy and the rest of Western Europe. Although the Yugoslav government denies authorizing the illegal trade, there seems to be little doubt of its involvement. European governments typically respond to cigarette smuggling by tightening laws and enforcement. But at least one government is trying to use market forces. Sweden recently announced a 27% reduction in its cigarette tax rate to reduce smuggling from Denmark. Officials in Stockholm hope that if they reduce the profit, smugglers will have less incentive to break the law. In Asia, China is the major market for contraband cigarettes. China National Tobacco says that 99% of foreign cigarettes sold in China are smuggled in. The government is believed to lose more than $1 billion in revenue each year as a result. Gangs involved in the illegal trade are mainly based in Hong Kong, smuggling the tobacco into China on fishing boats. The trade is greased with bribery: One gang estimated that it has paid out more than $13 million to Chinese officials for forged documents and other favors. Here in the U.S., the Tax Foundation estimates that Massachusetts loses $4 million per year due to cross-border sales and smuggled cigarettes, and that New York City loses $9.2 million. A recent survey by the federal Bureau of Alcohol, Tobacco and Firearms found California losing $30 million per year, Michigan losing $50 million and Washington state losing $100 million. The attorney general of New York estimates that his state is losing $300 million. World-wide, some 350 billion cigarettes are thought to be smuggled annually. All told, governments lose an estimated $16 billion in revenue as a consequence. There is no doubt that an increase of $1.10 or more per pack, as the Senate Commerce Committee has proposed, will increase the incentive to smuggle cigarettes and evade the tax. The higher the tax is raised, the greater the profit to be made from smuggling; the only question is how much will smuggling rise. The black market will not only reduce the government's revenue, but also undermine the effort to keep teenagers from smoking. It is something Congress should seriously consider before deciding that higher taxes are the way to reduce smoking. --- Mr. Bartlett is a senior fellow with the National Center for Policy Analysis. This article is adapted from a forthcoming study for the Alexis de Tocqueville Institution. |
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