October 12, 2006

Smugglers and Thieves Await Passage of California’s Prop. 86 Cigarette Tax Hike

(The following article originally appeared in the October 12, 2006 edition of the San Diego Union-Tribune.)

Beginning in October 2000, three East County men went on a six-month crime spree, robbing at least 20 gas stations and convenience stores in the San Diego area. Armed with semi-automatic weapons, they burst in, assaulted clerks and customers, and cleaned the stores out of cigarettes.

Why did the thieves take cigarettes and not the Twinkies or the razor blades or just the cash?

The answer, of course, is taxes. Federal and state cigarette tax hikes have turned a pack of cigarettes into a gold mine for criminals, spawning a massive black market that makes it easy for thieves to quickly unload stolen cigarettes for cash.

The San Diego group’s luck ran out with an arrest in April 2001, but similar gangs across California and smugglers all over the world are eagerly awaiting a Yes on Proposition 86, which would double, triple or quadruple their profit margins.

In addition to encouraging theft, high cigarette taxes have led to staggering levels of cigarette smuggling into the state and casual tax evasion by consumers. The Board of Equalization has the tough assignment of enforcing cigarette taxes, and it admits that about 300 million untaxed packs are sold in California each year despite requiring elaborately printed tax stamps to be affixed to each pack.

When deciding whether to vote Yes on Proposition 86 to raise the state’s cigarette tax from 87 cents to $3.47, the nation’s highest rate, Californians should weigh the severe law enforcement problems that come with being the preferred destination of cigarette smugglers.

New York City is currently that destination, with a tax of $3, and cigarette bootleggers work the streets just like drug dealers.

Before his murder in November 2003, teenager Cody Knox usually sold bootleg cigarettes on the corner of Fulton and Nevins streets in Brooklyn. Naively acting as if he were in a legitimate business, he cut his price and expanded his territory. Nearby street dealers showed Knox where price cutting can lead in a black market – they stabbed him to death. Prosecutor Anna-Sigga Nicolazzi stated the obvious at the trial of one of his murderers, “Obviously he wasn’t happy about (the competition).”

Knox’s death was one of many felonies caused by the cigarette turf war. By shifting the commerce from the corner store to the street corner, New York’s high cigarette taxes have diverted billions of dollars from legitimate business and government coffers to criminals, exposing many average citizens to violence. Does California want to emulate that?

California has a long, bizarre history of cigarette taxes and crime. During the 1960s, ’70s and early ’80s, the tax was low so the crime was tame: mostly illegal purchases on military bases and Indian reservations. Then in November 1988 voters approved Proposition 99, which raised the tax from 10 cents to 25 cents.

The new tax set off a wave of cigarette thefts across the state. As one Orange County sheriff’s lieutenant noted matter-of-factly, “It’s like anything else – when something becomes valuable enough, it will be stolen.”

With a quarter per pack at stake, it was suddenly possible for smugglers to profit $50,000 for every tractor-trailer load of cigarettes smuggled into the state. In the late ’90s the so-called Master Settlement Agreement between the tobacco companies and the state attorneys general added about 50 cents in tax to each pack, and California passed another tax hike at the ballot, raising its state tax to 87 cents. That tractor-trailer full of untaxed cigarettes was suddenly worth about $250,000 to a smuggler, and the result was predictable.

Armed robbery, kidnapping, and even attempted murder have been committed, all because of a hard-to-enforce tax that dangles easy money in front of the criminal element. If Proposition 86 becomes law, that same tractor-trailer will be worth about $1.2 million in stolen tax revenue.

Sales of tax-paid cigarettes will drop like a rock, and law enforcement will be completely overwhelmed. Not only must it try to intercept shipping containers filled with counterfeit cigarettes at the ports of Long Beach and Los Angeles, it will also have to deal with Web-based foreign firms that promise to defy tax authorities and ship tax-free cigarettes directly to customers in unmarked packages.

A good argument can be made that Californians should keep the state’s cigarette tax low out of mercy to the usually low-income people who smoke, but the state’s criminal history argues even more forcefully for a low tax. Convenience store clerks and the law enforcement community are the ones who’ll suffer most from the crime wave that has engulfed every state foolish enough to enact the nation’s highest cigarette tax.

Patrick Fleenor is chief economist at the Tax Foundation in Washington, D.C. His newest study of crime and cigarette taxes is “California Schemin’: Cigarette Tax Evasion and Crime in the Golden State.”