California Schemin': Cigarette Tax Evasion and Crime in the Golden State

October 05, 2006

Special Report No. 145

Executive Summary
Earlier this year federal agents closed down a ring that allegedly smuggled millions of packs of cigarettes from North Carolina to California, affixed counterfeit stamps to them, and sold them to the general public. This illicit enterprise reportedly cost the state government some $4.3 million in lost revenue.

On the morning of December 15, 2002, a band of robbers burst into a Merced distribution center and rounded its employees up at gunpoint. After tying up the workers the thieves used forklifts to load pallets of cigarettes into a truck. The robbers then grabbed rolls of California cigarette tax stamps and fled. Police estimated that the group made off with more than $1 million in loot.

The 2002 heist was not the first time that the distribution center or its employees has been victimized. Two years earlier one of its trucks was hijacked by two men. Its driver was forced into a nearby orchard where he was bound and gagged. The bandits then made off with $40,000 worth of cigarettes. The thieves were later apprehended by police.

These are just a few examples from the wave of tobacco-related crime that has swept California during the last eight or so years. At first glance these crimes appear bizarre. After all, each describes serious criminal activity involving a product not much different from the others that fill the shelves of convenience stores and gas stations. There is one major difference, however, and that is taxes.

Since 1998 tax hikes have helped raise the price of cigarettes in California to approximately $4.00 per pack, well above the price in other states or elsewhere in the world. The first two tax hikes occurred in November of 1998 when voters narrowly approved Proposition 10 and California joined 45 other states in the Master Settlement Agreement (MSA) with the four largest tobacco manufacturers.

Proposition 10 raised the state’s cigarette tax from 37 to 87 cents per pack,4 and the MSA raised nationwide taxes on cigarettes by nearly $250 billion over the next 25 years.5 Two smaller tax hikes soon arrived from Washington, as the federal government raised its tax from 24 to 34 cents per pack in January 2000 and then to 39 cents at the beginning of 2003.

On November 7 voters in California will decide whether to raise the state tax on cigarettes even higher, by an amount much larger than any state has ever considered. Proposition 86 would increase the state cigarette excise by $2.60, from its current rate of 87 cents to $3.47 per pack. Approval would give California the highest cigarette tax in the nation and push the price of a typical pack of cigarettes to around $6.50.

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