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Forget marijuana, states already face costly smuggling of untaxed cigarettes

Plain old tobacco cigarette smuggling is costing many states much-needed tax revenue.

Yes, the House last week decided to decriminalize marijuana. The bill's bipartisan passage (really!) was the first ever Capitol Hill vote to legalize — and tax— cannabis.

It's not going anywhere in the waning days of the 116th Congress. It might have a shot in the next one, which convenes in January 2021, depending on what happens with Georgia's runoffs for two Senate seats.

The federal stance on weed is frustrating for the 36 states that have legalized the plant for medicinal purposes, along with the 15 jurisdictions where it's legal for recreational uses to obtain the plant.

But many of those states also already are fighting a tax-related crime related to a legal inhalant.

Plain tobacco tax troubles: "Excessive tax rates on cigarettes in some states induce substantial black and gray market movement of tobacco products into high-tax states from low-tax states or foreign sources," according to the Tax Foundation.

The Washington, D.C.-based tax policy nonprofit used data from the Mackinac Center for Public Policy in the formation of its paper, Cigarette Taxes and Cigarette Smuggling by State, 2018, released on Nov. 24.

The growing cigarette tax differentials have made cigarette smuggling both a national problem and, in some cases, a lucrative criminal enterprise, says Ulrik Boesen, Senior Policy Analyst at the Tax Foundation and author of the paper.

The paper says New York, home to one of the highest state cigarette taxes in the country, loses around $1.2 billion in excise taxes. That's because by one estimate more than half — 53.2 percent — the cigarettes smoked there are smuggled into the state.

Mapping illicit tobacco movements: In fact, according to the study, New York has the highest inbound smuggling activity, based on 2018 data, in the United States.

Following on the Empire State's heels when it comes to inbound cigarette smuggling are California at 47.7 percent, Washington at 40.1 percent, New Mexico at 36 percent and Minnesota at 35.8 percent.

As for cigarettes going the other illicit direction, the five states with the highest level of outbound smuggling are New Hampshire at 66.8 percent, Idaho at 27.4 percent, Wyoming at 23.1 percent, Virginia at 22.8 percent and North Dakota 20 percent.

Check out the Tax Foundation map below to see where your state ranks as far as illicit tobacco transactions.


The paper also found that after Rhode Island increased its cigarette tax in the summer of 2017 from $3.75 to $4.25, the state moved up the inbound smokes smuggling list from 18th to 8th.

The Ocean State wasn't the only one to hike tobacco taxes. Cigarette tax rates increased in 39 states and the District of Columbia between 2006 and 2017, according to the report.

Taxes, crime and other smoking materials: While correlation isn't necessarily causation, it does make for some interesting tax arguments.

And when it comes to cigarette smuggling, the Tax Foundation says the increasing number of lawmakers who are looking into expanding tobacco taxes to e-cigarettes should take note of the paper products smuggling data. With distribution networks already well-developed, criminal gangs are poised to expand into vapor products, says the paper.

"The crafting of tax policy can never be divorced from an understanding of the law of unintended consequences, but it is too often disregarded or misunderstood in political debate, and sometimes policies, however well-intentioned, have unintended consequences that outweigh their benefits," wrote Boesen.

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Rick Brown

Speaking of Marijuana, don't you hope that the states where it is legal consider this when setting tax rates? There is already a flourishing black market from days before it was legalized. All of those state legislators with stars in their eyes about how much money to be collected from legal marijuana might want to consider what will happen if they make the legal stuff twice as expensive as black market? And what happens to that tax if states don't put pressure on the US Government to allow the legal part of the industry to be able to operate as a fully legal business? Another reason for most growers/dealers to continue in the black market.

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