Taxes on Cigarettes Increase Crime, Denied by ACS Spokesman

November 3, 2006

Patrick Fleenor on CNBC's "Power LuchYesterday, Tax Foundation Chief Economist Patrick Fleenor debated the effects of raising cigarette taxes around the country on CNBC’s “Power Lunch”. Supporting the cigarette tax was a representative from the American Cancer Society, Dan Smith. Despite a mountain of evidence, Mr. Smith denied the presence of an elaborate black market for cigarette bootleggers, calling it an “insignificant issue” and a “red herring”.

Sue Herera (host, Power Lunch): Let’s start with the black market issue, Mr. Smith. Ya know, it is well known that there is a black market, that there is a lot of smuggling of different contraband, if you want to call it that, some do. Other say it’s not only cigarettes, it’s liquor as well. What about the black market and cigarettes?

Dan Smith: I don’t accept the premise that there is a huge black market. In fact, we’ve raised cigarette taxes in 42 states in the last five years around the country and most Americans still buy their cigarettes in regular convenient stores and other places. I haven’t seen any credible evidence that there is in fact a significant black market.

Coming from an organization dedicated to improving public health, this willful ignorance is startling. If Mr. Smith would like “credible evidence” there are a number of public GAO reports, indictments, guilty pleas, and scholarly studies he could seek out. If nothing else, open up a newspaper:

Charlotte News and Observer – February 15, 2006 Federal agents think a warehouse in North Raleigh was the staging ground for an operation that smuggled millions of dollars worth of North Carolina cigarettes into California to avoid that state’s higher taxes. California officials think the sophisticated operation may have defrauded their state out of $4.3 million in cigarette taxes, according to a Bureau of Alcohol, Tobacco, Firearms and Explosives search warrant. From the loading dock of Five Star Wholesale, run out of a strip mall on Gresham Lake Road near Triangle Town Center, nearly a quarter-million cartons of cigarettes left for California in a two-year period, according to the federal search warrant… In just two days in June 2004, Geragosian bought close to $40,000 worth of cigarettes, or 2,415 cartons, from JR Tobacco in Burlington, agents said. In all, ATF agents think more than 495,000 cartons of cigarettes — with an estimated retail value of $8.8 million — were bought by Geragosian and others in North Carolina and sent to California.

Buffalo News (New York) – July 25, 2006 New York City filed a lawsuit Monday against seven wholesale tobacco distributors — three in Western New York — for failing to collect taxes on millions of cartons of cigarettes sold to retailers on Indian reservations statewide. The suit filed in U.S. District Court in Brooklyn alleges that the wholesalers — six in New York state and one in Vermont — routinely sell cigarettes at about a 50 percent discount by excluding $35 per carton in taxes. New York state and local governments estimate they lose more than $500 million a year from untaxed cigarettes. Once shipped to the Indian reservations, the untaxed cigarettes are sold at shops, on the street or over the Internet, city officials said. Large quantities “are routinely trucked back into the city for subsequent resale to city residents, either at retail locations or by street corner ‘buttleggers,’ ” the complaint said.

Scripps Howard News Service – August 07, 2006 According to a 2004 report from the U.S. General Accounting Office, “cigarette smuggling results in lost tax revenues, undermines government health policy objectives, can attract sophisticated and organized criminal groups, and could be a source of funding for terrorists.”

Associated Press – September 21, 2006 A Canadian member of an alleged smuggling ring that dealt in contraband cigarettes, counterfeit Zig-Zag rolling papers and fake Viagra and steered some of the profits to Hezbollah guerrillas pleaded guilty Wednesday to racketeering charges, the government said… The indictment alleged that from 1996 to 2004, the group ran a multimillion-dollar cigarette-trafficking ring out of Dearborn, Michigan. It purchased low-taxed or untaxed cigarettes from North Carolina and a New York Indian reservation and resold them in Michigan and New York, making profits by evading state cigarette taxes, prosecutors said… Some members charged a “Resistance Tax” in excess of the contraband cigarettes’ black market price to fund Lebanon-based Hezbollah, which has been classified as a terrorist group by the U.S. government, Murphy said. They also solicited money for Hezbollah’s support of families of those killed in suicide bombings and other terrorist operations, he said.

Associated Press – October 6, 2006 Two more people have pleaded guilty in a multimillion-dollar case involving the sale of untaxed cigarettes to Indian smoke shops in Washington. Peter and Peggy Mahoney, 53 and 38 respectively, who operated the Warpath Smoke Shop on the Coeur d’Alene Reservation in Plummer, Idaho, also agreed Tuesday in U.S. District Court to forfeit $1.4 million in cash… The money was part of the $3.1 million in cash and $2 million in bank accounts seized by a state and federal task force that investigated interstate smuggling of untaxed cigarettes, U.S. Attorney James A. McDevitt said.

Not significant? Losses totaling hundreds of millions every year. Murders, kidnappings, armed robbery, and ties to terrorist groups?

Even if proponents of high tobacco taxes find brutal acts of violence and terrorist operations insignificant, they should still be concerned that, above all, people are not buying fewer cigarettes as a result of tax increases. They are simply buying cigarettes illegally. As a solution to public health, tax hikes on cigarettes have failed.

By Mr. Smith’s own admission, cigarettes are highly addictive. “More addictive than heroin,” he said in yesterday’s debate.

Obviously the high price, illegality and risks associated with using heroin haven’t stopped its users. Does the American Cancer Society really think $2.60 is going to stop smokers?


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