May 7, 2008

Cigarette Taxes Are Fueling Organized Crime

This commentary appeared in the Wall Street Journal on May 7, 2008.

Cigarette Taxes Are Fueling Organized Crime

Last month, New York law enforcement authorities announced the arrest of Queens resident Rafea al-Nablisi for smuggling 12,000 cartons of cigarettes a week. It was not the first such arrest, and thanks to New York’s latest cigarette tax hike, it will not be the last.

On April 23, less than two weeks after Mr. Nablisi’s arrest was made public, Gov. David Paterson signed into law a $1.25 per-pack tax hike on top of the state’s $1.50 per-pack tax. That’s in addition to New York City’s own $1.50 per-pack tax. Come July 1, New York City’s smokers will be paying on average $9 a pack for legal cigarettes.

But if history is any guide, most cigarettes sold will actually be trucked up from Virginia, or shipped in from China, by “butt-leggers” who can make over $1 million on each tractor-trailer load of smuggled smokes. The blunt fact, which politicians of both political parties are determined to ignore, is that high cigarette taxes in New York have led to a bloody, decades-long smuggling epidemic.

While the problem first surfaced during the Great Depression, tax hikes in the early 1960s created a major profit opportunity for smugglers and kicked the epidemic into high gear. By 1967, a quarter of the cigarettes consumed in the Empire State were bootlegged. New York City’s finance administrator labeled cigarette smuggling the “principal stoking facility of the engine of organized crime.”

Crime rapidly spread beyond New York’s borders, as trucks carrying cigarettes across the country were hijacked and businesses selling them robbed to supply New York’s black market. In 1972, the chairman of a New York commission told Congress that retailers and other workers were “confronted almost daily with the risk and dangers of personal violence which are now inherent in their industry.”

State and city officials responded with mandatory prison sentences and expanded police powers of search and seizure. But in 1973 a state commission found the crackdown to be “completely ineffective and a failure.” Desperate state officials formed a special task force that proposed abolishing the city’s cigarette excise. Gov. Malcolm Wilson embraced the idea, explaining: “One major incentive to organized crime is the high New York City cigarette taxes, piled on top of the state tax, which have made that city the promised land for cigarette bootleggers.”

Fuhgedaboutit. Parochial politics scuttled any possibility that the tax would be abolished. But a series of homicides, including witness murder, discouraged lawmakers from further tax hikes in the late 1970s and early ’80s. High inflation in those years drove cigarette prices up, but the fixed excise tax—the smuggler’s profit margin—declined by more than 40%, greatly reducing bootlegging and related crime.

Lawmaker memories are short, however, and the state again began raising the cigarette tax in the 1980s. As a state tax enforcement official noted, it soon became “literally more profitable to hijack a cigarette-delivery truck than an armored truck.” More tax hikes followed in the 1990s. City and state records of tax-paid cigarettes show sales plummeting, despite stable smoking rates. This signals the resurgence of smuggling and large-scale tax evasion.

As the Bureau of Alcohol, Tobacco and Firearms said in September 2002 of New York’s cigarette smuggling, “Traditional organized crime is involved, terrorist groups are involved, and street gangs are involved.” Rivalry among these groups has resulted in numerous shootings and homicides.

The connection to terrorism is no exaggeration. When New York police cracked another smuggling ring in 2005, they uncovered a multimillion dollar flow of funds from New York City to unknown individuals in the Middle East. Police Commissioner Raymond Kelly gave voice to the obvious conclusion: Terrorists probably got the money.

Just a few weeks before that 2005 bust, Buffalo-area businessman Aref Ahmed had been sentenced to three years and a month for cigarette smuggling. The feds said he’d used the racket to fund “scholarships” at terrorist training camps in Afghanistan during the spring of 2001. Going back to 1993, counterfeit cigarette stamps were found in the apartment of the first World Trade Center bombers.

Politicians continue to use the health of smokers as their excuse for higher cigarette taxes. This view is myopic. As Gov. Wilson argued three decades ago, high cigarette taxes are bad public policy because of their effect on the rest of us. In the 1960s and ’70s, organized crime exploited high cigarette taxes at our expense. Today we face an even deadlier adversary.


Mr. Fleenor is chief economist of the Tax Foundation and author of “Cigarette Taxes, Black Markets, and Crime: Lessons from New York’s 50-Year Losing Battle” (Cato Institute, 2003).