In this second part of the halftime report for Tax Foundation Forum: Making Sense of Profit Shifting, we discuss the key takeaways from the first half of our series on profit shifting (read part I here). In this post, we...
- New York #1 in Cigarette Smuggling
New York #1 in Cigarette Smuggling
Over 60% of Empire State Smokes Being Sold Illegally
Washington, D.C., January 10, 2013—Over 60 percent of cigarettes sold in New York are smuggled in from lower tax states, the highest rate in the country, according to a new analysis by the Tax Foundation. Increasing excise taxes on cigarettes have created lucrative incentives for black market trafficking between states, with illegal sales on the rise nationwide. After New York, the next highest rates of smuggling are in Arizona, New Mexico, Washington, and Rhode Island.
“Public policies often have unintended consequences that outweigh their benefits,” says Tax Foundation economist Scott Drenkard. “Dramatic increases in state cigarette taxes have yielded additional revenue for priorities like public health, but have also fueled the rise of organized crime and law enforcement corruption.”
New York is the highest net importer of smuggled cigarettes, totaling 60.9 percent of the total cigarette market in the state. New York also has the highest state cigarette tax ($4.35 per pack), not counting the local New York City cigarette tax (an additional $1.50 per pack). Smuggling in New York has risen sharply since 2006 (+170 percent), as has the tax rate (+190 percent).
Most smuggling cases start with criminals procuring discounted packs from low-tax states to sell in high-tax states, but may also include counterfeit state tax stamps, counterfeit versions of legitimate brands, hijacked trucks, or bribed officials turning a blind eye to illegal shipments.
Data on illegal cigarette sales comes from the Mackinac Center for Public Policy, a Michigan think tank, which uses a statistical analysis of available data to estimate smuggling rates for each state. Their most recent report uses 2011 data and finds that smuggling rates generally increase in states after they adopt large cigarette tax increases.
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