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Tax hikes may ignite black market cigarette market

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The big cigarette tax increases that many states are instituting to balance their out-of-whack budgets are raising fears that the trend will make black-market smokes more profitable and lead to more smuggling.

The smuggling has been going on for generations and already costs states untold billions in tax revenue.

Criminal gangs stock up in low-tax states like Virginia and Missouri, truck the cigarettes north and illegally resell them in high-tax states like Michigan and New Jersey. Others buy cartons and cartons of tax-free smokes on Indian reservations and sell them elsewhere. Buyers order untaxed cartons of murky origin on the Internet. And ships arrive from China carrying cargo containers filled with counterfeit cigarettes.

Law enforcement officials and others worry the widening price spread will make the situation worse.

Phillip Awe, the chief tobacco law enforcer for the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, said the agency has taken notice. The ATF is refining its national strategy for fighting cigarette trafficking, he said, and has substantially expanded its investigations, opening up some 700 new cases in five years.

Fourteen states have raised tobacco taxes in the past two years, according to the Tobacco Merchants Association. Legislation asking for increases is pending in 19 other states. They include a proposed 50-cent increase in South Carolina, where the 7-cent tax is the nation's lowest.

New York is raising its tax $1.25 to $2.75 a pack, the highest in the nation. New York City charges an additional $1.50, which will bring the cost of a typical pack of cigarettes to $9.

Arthur Katz, executive director of the New York State Association of Wholesale Marketers and Distributors, which represents dealers, said the changes are certain to drive smokers to underground sources.

"You'd have to be crazy to go and buy cigarettes at the store at almost $9 per pack," Katz said.

Tax hikes may ignite black market cigarette market 04/14/08 [Last modified: Thursday, October 28, 2010 10:33am]

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