Each year we produce the State Business Tax Climate Index, which promotes tax competition between the states and motivates policymakers to reform their tax systems toward pro-growth policies. Over the past few years, the...
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- New Rhode Island Cigarette Smuggling Law is a Start…
New Rhode Island Cigarette Smuggling Law is a Start…
SB 2380, which substantially increases penalties for illegal cigarette sales in Rhode Island are now in effect after being signed by Governor Chafee. The legislation, signed into law last week, increases fines and imprisonment periods by as much as twenty times, and reclassifies violations as felonies. While such measures will discourage many potential criminals, they are not the most effective deterrent to illicit trade.
Crooked businessmen, albeit crooked, are still businessmen. They seek opportunities to maximize profit, and vast differences in state cigarette excise tax rates generously provide this opportunity. Cigarette packs are $3.20 cheaper in Virginia than in Rhode Island, offering smugglers a $32 profit margin per carton, and a $96,000 profit margin per van load. Subtract transportation and labor costs, and smugglers can pocket $95,500 for every delivery.
Penalties help to push back against this profit motive, but matter less to large scale, sophisticated operations, as they can invest substantial resources in minimizing the risk of being caught and profits grossly overshadow per-violation fines.
A few of these massive operations in Rhode Island have recently been exposed. Three years ago, four individuals were charged with illicit importation and sale of cigarettes which cost the state $5.7 million in forgone tax revenue, and just last year, seven individuals were indicted for a two-year-long smuggling operation that cost the state $1.05 million in forgone revenue.
While these enforcement victories are fully commendable, the likelihood of the existence of other large-scale smuggling operations remains. Peter F. Neronha, U.S. Attorney for the District of Rhode Island, forebodingly remarked in regard on the most recent trafficking indictments, “Our work to defeat this type of fraud continues on many fronts. There is certainly more to come.”
Perhaps Rhode Island should consider a much simpler, cost-effective, surefire approach to combating illegal sales: lowering its cigarette excise tax rate, which is the third highest in the nation. For every penny the tax is lowered, smugglers’ profit margin decreases by a penny per pack and smugglers are a penny per pack closer to shutting down operations.
For our latest report on cigarette smuggling, click here.
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