SCHIP, Cigarette Taxes, and Crime

July 16, 2007

Here is a question for lawmakers to consider before casting their votes to raise the federal cigarette tax by 61 cents per pack: How can the number of smokers have increased over the last decade while the number of tax-paid cigarettes has fallen sharply?

The answer is that Americans are smoking millions of bootlegged cigarettes.

Consider the case of Jorge Abraham. He’s not exactly the stereotypical border-crossing smuggler: a quadriplegic living with his parents in El Paso. But prosecutors called him “extremely resourceful” when he smuggled millions of packs of cigarettes into the U.S. from China and distributed them nationwide. In 2005 he pled guilty and went to prison.

What drove Mr. Abraham, and what encourages others like him, is the simple arithmetic of cigarette tax evasion. Today a pack of brand name cigarettes can be had for as little as $1.25 in low-tax jurisdictions around the world. Due mostly to federal, state and local taxes, the U.S. price for that same pack reaches $7.50. When Jorge Abraham or any other smuggler moves just one shipping container containing 200,000 packs into the U.S., the profit potential is a cool $1 million.

As in other black markets—such as that for illicit drugs—such enormous profits lure many violent individuals into the trade. A recent string of homicides and shootings in New York City described in a Tax Foundation paper on cigarette tax evasion illustrates just how severe these problems can be.

Tax evasion is by no means the only crime that will rise in the wake of a much higher federal cigarette tax. Cigarettes are often the product of choice for thieves since the development of an active black market creates a place where they can quickly be sold for cash. Across the country cigarette tax hikes have been accompanied by tobacco-related crime waves that threaten truck drivers and retail clerks and other innocent people along the cigarette distribution chain.

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