Cigarette tax hikes good news for bootleggers (butt-leggers?)

Just as pressure differentials spawn tornadoes, price differentials create a vortex of demand. The widely different excise taxes put on cigarettes from state to state has turned millions of smokers into smugglers, and smugglers into rich smugglers.

Can you blame a smoker in New York, who is paying state excise tax of $2.75, if he buys a few cartons while on vacation in South Carolina, where the tax is only $.17 a pack? Do the math. Paying an extra $2.58 a pack times two packs a day: $5.16. Thirty days a month: $154.80. Twelve months a year: $1,857.60 a year up in smoke. Of course, most New Yorkers don't pass through the Carolinas regularly, but many live near Native American tribal grounds, where state excise taxes don't apply at all. A recent study concluded that 71 percent of western upstate New York smokers buy their smokes there.

Cross-border shopping is only one unintended consequence of cigarette tax disparity. According to Patrick Fleenor, Senior Economist at the Tax Foundation, organized crime is thriving in this market. In Canada, which has the same problem, the Mounted Police recently busted members of Hell's Angels for dealing contraband butts.

Again, do the math. A carton of fags can be purchased in South Carolina for $23.00 less than in Massachusetts. By my calculations, 8,000 cartons of smokes would fill about 20 percent of a 40-foot trailer, and weigh very little. If they were dealt in Massachusetts at $10 a carton below the state's going rate, that adds up to a profit of $104,000.

These kinds of numbers also account for the increase in counterfeit smokes, illegal imports and counterfeit tax stamps. A California man was recently sentenced to 42 months in prison for smuggling over a million packs of butts into the country from China.

On the first of this month, Arkansas became the first state to address this cross-border cigarette shopping problem. It raised the state tax from $0.59 to $1.15, but allows outlets near the borders with Missouri ($0.17 a pack), Louisiana ($0.36) and Mississippi ($0.18) to sell smokes at just $0.03 more than the rate of the bordering state. Though I have to wonder -- won't Arkansas smokers who don't live near the border flock to those border towns for the discount?

The growing cigarette excise tax disparities are like a giant stimulus program for the underworld. While the Tax Foundation estimates the increase in federal cigarette excise tax that took effect April 1st will bring in an additional $6.3 billion in 2010, it will probably put several times that amount into the pockets of criminals, even criminals like Joe Average who stock up while driving through South Carolina.

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