4/11/23 – States with the highest rate of cigarette smuggling, mostly due to their excessive tax rates, are as follows:

Key Findings:

• Excessive tax rates on cigarettes induce substantial black and gray market movement of tobacco products into high-tax states from low-tax states or foreign sources.
• New York has the highest inbound smuggling activity, with an estimated 53.5 percent of cigarettes consumed in the state deriving from smuggled sources in 2020. New York is followed by California (44.8 percent), New Mexico (45.5 percent), Washington (41.5 percent), and Minnesota (34.8 percent).
• New Hampshire has the highest level of net outbound smuggling at 52.4 percent of consumption, likely due to its relatively low tax rates and proximity to high-tax states in the northeastern United States. Following New Hampshire is Indiana (35.6 percent), Virginia (27.6 percent), Idaho (25.8 percent), Wyoming (24.4 percent), and North Dakota (18.6 percent).
• Illinois and New Mexico significantly increased their cigarette tax rate from 2019 to 2020. Both states saw major increases in cigarette smuggling.
• Policymakers interested in increasing tax rates should recognize the unintended consequences of high taxation rates. Criminal distribution networks are well-established and illicit trade will grow as tax rates rise.
• Source: Tax Foundation

Tobacco Tax Differentials Incentivize Smuggling

People respond to incentives. As tax rates increase or products are banned from sale, consumers and producers search for ways around these penalties and restrictions. In cigarette markets, consumers tend to shop across borders where the tax rates are lower and dealers develop black and gray markets to sell illegally to consumers, paying little or no tax at all. Growing cigarette tax differentials have made cigarette smuggling both a national problem and a lucrative criminal enterprise.

Each year, scholars at the Mackinac Center for Public Policy estimate cigarette smuggling rates for each state.[1] Their most recent report uses 2020 data and finds a strong positive relationship between cigarette smuggling and tax rates across U.S. states and the District of Columbia. The data also demonstrate that when states increase their cigarette taxes, smuggling rates increase, both in the form of increased purchases in neighboring states and through illicit international channels. Source: Tax Foundation

4/11/23 – From The Center Square:

(The Center Square) — Connecticut and other states have seized shipments of illegal cigarettes from China and other countries under a settlement with the U.S. Postal Service to resolve claims it wasn’t doing enough to crack down on tobacco smuggling.

A new report by Connecticut Attorney General William Tong said between January and March the Postal Service seized 3,000 packages containing a total of 10,000 cartons of cigarettes shipped from overseas in violation of federal laws. Most of the illegal shipments were mailed from China, Israel and Russia, the AG’s office said.

Tong said the data shows that the provisions of a settlement are working, “resulting in the detection and destruction of thousands of smuggled cigarettes.”

“We took action to force USPS to do its job to stop the flow of foreign contraband cigarettes into Connecticut and the United States,” Tong said in a statement. “Contraband cigarettes cost states hundreds of thousands of dollars in lost tax revenue and hinder smoking cessation efforts.”

A 2009 law approved by Congress prohibits the USPS from “knowingly accepting or transporting” cigarettes in the mail unless authorized. Tong said while the law has deterred domestic shippers, it has been “less effective” in stopping delivery of cigarettes from overseas because USPS has “routinely returned identified packages of cigarettes to their foreign shippers.”

From Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF)

The Preventing All Cigarette Trafficking Act (PACT Act) was created by Congress in 2010 and it authorizes ATF to prevent criminal organizations from profiting from the illegal sales of tobacco products and imposes penalties for avoiding sales tax payments.

The PACT Act has four major requirements:

• Regulate the mailing of cigarettes and smokeless tobacco products to consumers through the U.S. Postal Service.
• Identify new requirements for registration, reporting, delivery, and recordkeeping including a List of Unregistered or Non-Compliant Delivery Sellers which is kept and compiled by ATF.
• Raises criminal penalties for felony violations to up to 3 years imprisonment.
• Provides ATF with inspection authority to examine any records required to be maintained and any cigarettes or smokeless tobacco kept on the premises.

PACT Act Amendment

On March 27, 2021, Congress amended the PACT Act to include new regulations regarding the delivery and sales of electronic nicotine delivery systems (ENDS), which Vapes and e-Cigarettes, flavored and smokeless tobacco.
Individuals or businesses that sell, transfer or ship for profit any ENDS in interstate commerce, must now register with ATF in accordance with 15 U.S.C. §§ 375 and 376. They must also register with any states that they ship vapes into.
As part of the enforcement mission, ATF regularly collaborates with the U.S. Postal Service (USPS) and Food and Drug Administrations’ Tobacco 21 enforcement teams to prevent sales and shipments of Vapes and e-Cigarettes to minors.

See USPS Domestically Restricted Items

From Tax Foundation:

The biggest increase in smuggling from 2019-2020 came in Illinois. Illinois increased its cigarette tax rate by $1.00 per pack, resulting in a new state excise tax of $2.98. Including the $3.00 per pack tax in Cook County and $1.18 per pack in the city of Chicago brings the total taxes in Chicago to $7.16 per pack. The cigarette taxes in America’s third-largest city are the highest in the county.

Net cigarette smuggling in Illinois increased by more than 14 percentage points in 2020, an estimated increase of nearly 44 million cigarettes smuggled. This increase was greater than all other states combined, moving the state from the 16^th highest to the 7^th highest inbound smuggling rate in the country. Overall, Illinois missed out on more than $334 million in cigarette taxes in 2020 due to smuggling, an increase of nearly $200 million from 2019.

Illinois’ neighbors—Indiana, Iowa, Kentucky, and Wisconsin—all saw an increase in outbound smuggling. Table 1 shows that outbound smuggling increased by 17.7 percentage points in Indiana, more than $42 million worth of revenue for the Hoosier State, moving Indiana down four spots in the ranking of states by net inbound smuggling. Wisconsin also saw an increase in outbound smuggling, adding more than $15 million for the Badger State.

New Mexico increased its cigarette tax rate by $0.34 per pack in 2020 and saw its smuggling rate increase by 6.3 percent, moving it two ranks higher and giving it the third-highest smuggling rate in the country, with smuggled cigarettes accounting for 43.46 percent of the total cigarette market. New Mexico lost an additional $19.3 million from the increase in smuggling. Neighboring states Colorado, Oklahoma, and Texas all saw an increase in outbound smuggling, with the largest revenue effect coming from Texas.

Nationwide, New York continues to have the greatest rate of cigarette smuggling, with smuggled cigarettes accounting for 53.5 percent of total cigarette consumption in the state. New York also has one of the highest state cigarette taxes ($4.35 per pack), not counting the additional local New York City cigarette tax ($1.50 per pack), yielding a combined rate of $5.85 per pack.

The inbound flow of cigarettes not appropriately taxed by New York costs the state roughly $1.1 billion each year in lost revenue. And the state needs to use resources to address its black market problems. In 2020, following a long-term investigation into an individual’s cigarette smuggling activity, a process including court-authorized search warrants, wiretaps, grand jury subpoenas, and other investigative tools, New York seized more than $1.3 million in cash and 6,267 cartons of untaxed cigarettes, according to a press release from the Queens’ District Attorney.[2] But even law enforcement successes are costly and only stop a drop of water in the Hudson River of smuggling activity. Read full report