The unseen cigarette-tax crime wave

Michele Steel
Orange County Supervisor (2nd District) and Former California State Board of Equalization Member

Originally posted in the Orange County Register.

Sophisticated criminal organizations have one
incentive: money. They find a need and fill it. It doesn’t matter whether the
product is narcotics, prostitution or terror, the goal is the same; more money.
They use that money to fund their other illegal activities.

As a result of rising tobacco taxes across the
country, these organizations are increasingly moving to cigarette smuggling for
the potential profit. Cigarette-related crime is rising across the U.S. In California,
1.4 billion packs were estimated to have been consumed in fiscal year 2005-06.
And 209 million packs were estimated to have been sold tax-free, resulting in a
$182 million revenue loss for the state. That’s more than the general fund
budget for Huntington Beach.

There’s no doubt that higher cigarette taxes lead
to less smoking; that’s a basic law of economics. According to the State Board
of Equalization, "For cigarettes and nearly all goods there is an inverse
relationship between prices and sales. Higher prices almost always result in
lower sales if there are no other major changes in government policy, consumer
preferences or other factors."

There’s also no doubt that tax evasion rises along
with taxes. "Cigarette retailers and smokers certainly have incentives to
secure untaxed supplies of cigarettes since they could reduce their cigarette
costs by up to 37 percent by doing so."

Today we have further proof that higher taxes lead
to increased traffic in the black market, and to increased crime associated
with this illicit trade. A March study by the U.S. Government Accountability
Office, "Illicit Tobacco," says that "illicit trade in tobacco
products offers high rewards when taxes can be evaded. The tax differentials
between higher-tax states and lower-tax states can increase incentives."

The GAO said taxes have been evaded by distributors
"using a number of schemes, including either failing to submit excise tax
returns or submitting fraudulent returns, falsifying other commercial documents
like invoices, and using dummy corporations or out-of-state distributors to
deceive state authorities." The U.S. Bureau of Alcohol Tobacco and
Firearms has seen traffickers of guns and drugs add cigarettes to their contraband.
The Justice Department saw a one-year 39 percent increase in tobacco smuggling
prosecutions, referred to them from ATF, in fiscal year 2010.

In 2002, a federal jury in North Carolina convicted
Mohamed Hammoud of using a multimillion-dollar cigarette smuggling operation to
funnel money to the terrorist group Hezbollah, according to a U.S. House of
Representatives report from 2008.

The Register reported that more than 22,000 cartons
of counterfeit cigarettes were seized by federal authorities at the port of Los
Angeles/Long Beach in December.

Frederic Bastiat said that all economic policy has
two sides, one seen and one unseen. Taxes don’t only raise revenue
(California’s cigarette tax raised $839 million in fiscal year 2009-10); they
also change consumers’ behavior; for better, and for worse.

Cigarette taxes raise revenue, and they reduce
smoking. But they also create an increased incentive for smokers, and for
criminals, to evade the taxes and break the law.

For unwitting smokers, they’re buying what they see
as the same product for a lower price. For criminals there is a new opportunity
to engage in another profitable enterprise. In the current state budget battle,
various tax schemes are popping up everywhere you turn, including a proposed $1
increase in cigarette taxes.

Policymakers should take note that tax proposals
are always veiled in good intentions, but many times the negative consequences
remain unseen. It’s time to lift the veil.

Comment on this article


Please note, statements and opinions expressed on the Fox&Hounds Blog are solely those of their respective authors and may not represent the views of Fox&Hounds Daily or its employees thereof. Fox&Hounds Daily is not responsible for the accuracy of any of the information supplied by the site's bloggers.