April 6, 2010

High cigarette taxes stoke bootlegging, violence

This op-ed appeared in the Buffalo News on April 6.

Last month, a Virginia man pleaded guilty to hiring a hit man to murder a couple he suspected of stealing his bootleg cigarettes. His gang was planning to sell 388,000 cartons in New York for a profit of more than $1 million.

“This investigation highlights the illicit profits and potential violence associated with those who illegally traffic in contraband cigarettes,” said Bureau of Alcohol, Tobacco and Firearms Agent Willie Brownlee.

New York has a long, bloody history of cigarette tax evasion. The Legislature’s plan to add yet another dollar to the tax will further endanger the public.

Serious problems began in the early 1960s, when tax hikes caused organized crime to ruthlessly push aside competitors and dominate the racket. By 1967, a quarter of the cigarettes consumed statewide were bootleg, and the problem was much worse in New York City, where the finance administrator labeled it the “principal stoking facility of the engine of organized crime.”

When Congress investigated, the chairman of a state investigatory body admitted the tax hikes created a situation where legitimate workers were “confronted almost daily with the risk and dangers of personal violence which are now inherent in their industry.”

Embarrassed, state and city officials declared war on cigarette bootlegging—through mandatory prison sentences, expanded powers of search and seizure and stricter regulation—but didn’t lower the tax. This approach was later deemed completely ineffective.

Desperate for solutions, then-Gov. Malcolm Wilson endorsed eliminating the city’s cigarette tax, saying, “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.”

While the proposal never made it out of the State Legislature, a string of homicides discouraged lawmakers from raising the tax for a few years.

Lawmakers couldn’t resist a “sin” tax for long, however, and by the mid-1980s the cigarette tax was so high that it was “literally more profitable to hijack a cigarette delivery truck than an armored truck,” one official said.

Today a wide range of criminals smuggle cigarettes. “Traditional organized crime is involved, terrorist groups are involved and street gangs are involved,” said one ATF official.

Government policies should suppress crime, not encourage it. Bootlegging could be eliminated overnight by relying on broad-based, low-rate taxes—such as those on income, property and sales – rather than on high taxes on easily transportable goods.

Cigarette taxes incite crime; that’s proven, so instead of adding a dollar to the cigarette tax, Albany should subtract a dollar. Law enforcement could then focus on real threats to public safety like violent crime and terrorism.

Patrick 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.”