New York: Economist Warns That Cigarette Tax Hike Will Worsen Organized Crime

Patrick Fleenor, chief economist of the Tax Foundation and author of “Cigarette Taxes, Black Markets, and Crime: Lessons from New York’s 50-Year Losing Battle,” said in an opinion piece published in the Wall Street Journal that New York State’s politicians of both political parties are ignoring the “blunt fact” that the State’s high cigarette excise tax rate, which will rise another $1.25 to $2.75 per pack on July 1st, has led to a “bloody, decades-long smuggling epidemic.” Fleenor said much of the cigarettes sold in New York State will be trucked up from Virginia or shipped from China by “butt-leggers” who can make over $1 million per tractor-trailer load of smuggled cigarettes. He said tax hikes in the early 1960s created a profit opportunity for smugglers and by 1967, 25% of the cigarettes consumed in the State were bootlegged. High inflation in the late 1970s and early 1980s drove up cigarette prices, but the excise tax remained unchanged, thereby reducing smugglers’ profit margin and therefore related crime, Fleenor said. Lawmakers began raising the cigarette tax again in the 1980s and the 1990s, and smuggling and large-scale tax evasion resurged, he noted. Lawmakers continue to argue about the health of smokers as their reason for raising cigarette taxes, but as Gov. Wilson argued three decades ago, high cigarette taxes are bad public policy, he said. While organized crime exploited high cigarette taxes in the 1960s and 1970s, there is an “even deadlier adversary” today, he warned. The connection between cigarette smuggling and terrorism is no exaggeration, as a smuggling ring that police cracked in 2005 uncovered a multimillion dollar flow of money from New York City to individuals in the Middle East, Fleenor said (WSJ 5/7). 

I find this to be an extremely interesting story.

What are your thoughts on this topic?

Is Patrick on target?

Is there anything that can be done or is it just inevitable that misguided lawmakers will continue to attempt to use tobacco taxes to meet budget shortfalls? 

Let folks know what you think on this very interesting topic!  


#1 TAZ on 05.13.08 at 12:39 AM

Found this amazing article – Check out the number! $35 million a month!

May 11, 2008 — Federal prosecutors on Long Island notched a small victory over New York’s booming illicit cigarette trade earlier this month, winning the conviction of black-market kingpin Rodney Morrison on racketeering conspiracy and weapons charges.

Morrison, who’s looking at up to 30 years in prison, turned an estimated profit of $35 million per month running the Peace Pipe Smoke Shop on the Poospatuck Indian Reservation.

Yet, astounding as that number is, it barely scratches the surface of a trade that’s long been one of New York’s biggest – and most deadly – public-policy embarrassments

#2 CIG GUY on 05.14.08 at 1:39 AM

It would seem to me that the payday of a million dollars per truck load would be very appealing to those are looking for ways to fund a movement. Pretty scary to think that we are putting ourselves at risk in todays environment.

#3 CIG GUY on 05.31.08 at 10:56 AM

Again I must say Government intervention leads to disaster! Here is another example of how the government mismanages.

#4 TAZ on 06.07.08 at 10:08 AM

This info was in the New York Post and was sent to via email to be posted. Thank you to “Fuming in NY”.

“A Tax Hike for Terror”

June 6, 2008 — It was billed as a day of celebration: New York’s $1.25-a-pack cigarette tax hike went into effect on Tuesday, rendering state and city Health Commissioners Richard Daines and Thomas Frieden giddy with anticipation.

State cigarette sales will plummet by 160 million packs a year, they said, and tens of thousands of New York kids won’t die prematurely from smoking. Plus, state tax revenue will bulge by a cool $265 million this year.

What’s wrong with that?

Well, a rather more jarring perspective comes courtesy of the Richmond, Va., US attorney’s office – which this week announced trafficking and money-laundering charges against some of New York’s biggest cigarette smugglers.

The indictments – 27 in total – reveal the extent of the underworld nourished by Daines, Frieden & Co.’s naivete.

As part of a 17-month sting operation orchestrated by the state Department of Taxation & Finance, the alleged butt-runners bought more than 260,000 cartons of tax-free smokes in Virginia.

Most were then sold to city retailers, with the smugglers and retailers splitting the $3-a-pack in state and city taxes then levied on cigarettes.

(Even that volume doesn’t tell the full story. Thanks to Albany’s stubborn refusal to enforce its taxes on Indian reservations, city smugglers have a prime source of product much closer to home: More than 30 million cartons of cigarettes came off the state’s reservations last year alone.)

Still more disturbing, however, is where all the money could be going. Officials have long known that domestic buttlegging is an attractive source of funding for al Qaeda, Hezbollah and other terrorist outfits – probably to the tune of millions of dollars a year.

And as The Post’s Dan Mangan reported, authorities are investigating possible terror ties of those indicted in the sting, who they say sent all of their profits to the Middle East.

One thing’s for sure: With taxes up another $1.25 statewide, smugglers’ profit margins sure aren’t going down.

Not that you’ll hear the anti-tobacco crowd talk about that.

#5 Walter Raleigh on 06.23.08 at 10:03 PM

Being a tobacco guy this sure sounds like the message the tobacco companies are looking to get out to the consumers to garner support.

#6 Native Son on 07.01.08 at 11:51 PM

Too much is made of volume on the indian reservations. Folks should focus more on the foriegners that are using smuggling to raise money. Gosh maybe the US government should stop the illegal immigration issue that is bleeding the government of revenue. What takes place on the Indian reservations is minor towards the ills that are present and accepted by the government. Anyone know where that NY persecutor is today?

#7 Jersey Guy on 07.03.08 at 4:33 PM

It would seem to me that these high taxes will help out the lower tiers if marketed properly. Imagine it will grow the lil cigar business also.

#8 SMOKEY on 07.20.08 at 2:18 AM

Smuggling of contraband cigarettes has been around even before the high taxes. I just think this is a tobacco company line of thinking. Big tobacco tries anything it can to make people feel sorry for it. How can one feel sorry for big tobacco when they continue to thwart the efforts of new and smaller companies.

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