Higher tobacco taxes increase revenue — for smugglers

Raising California’s cigarette tax has been proposed as a relatively painless way to finance medical research and shrink the state budget shortfall. But do higher taxes mean higher revenues?

Not necessarily.

Oakland mayoral candidate Don Perata wrote in the Mercury News July 8 that his 2012 statewide ballot measure to raise the tobacco excise tax by $1 per pack would generate $855 million annually for cancer research. Similarly rosy predictions are attached to tobacco tax increases proposed in the state Legislature.

California and other states have already learned an expensive lesson: Like every other product, there’s a limit to what consumers will pay for cigarettes. When taxes drive the price beyond that limit, consumers will find a way to avoid paying it.

New Jersey lawmakers thought they could produce revenue for the state treasury by raising cigarette taxes, but when the tax reached $2.57 per pack, smokers learned they could save money buying cigarettes over the Internet, on an Indian reservation or from stores in nearby states where taxes are lower. New Jersey’s tobacco tax revenue has dropped every year since the tax increase took effect.

Washington, D.C., and Chicago are experiencing the same thing, while stores in neighboring towns report an influx of new customers.

If California raises its tobacco tax, many smokers won’t have to drive anywhere; cigarettes will come to them. The California Board of Equalization found that the tax increase mandated by Proposition 99 in 1988 significantly increased smuggling in the state. During the 1990 fiscal year, the equivalent of four tractor-trailers filled with untaxed cigarettes entered the state every day, and California lost millions in revenue.

Smuggling increased again in 1999 after Proposition 10 and the national Tobacco Master Settlement Agreement raised cigarette taxes by 95 cents a pack. By 2006, one of every four cigarettes consumed in California was untaxed.

California loses tax revenue when cigarettes are transported to California in SUVs returning from weekend trips to Nevada, in tractor-trailers from across the country, in containers shipped from China and in duffel bags from Mexico. Cigarettes can be purchased legally on Indian reservations and military bases with no state tax.

Earlier this year, a Glendale man was sentenced to seven years in prison and ordered to pay $3.2 million in restitution after he was convicted of smuggling more than 370,000 cartons of cigarettes from North Carolina to California. The potential for illegal profits from smuggled cigarettes is enormous. According to the U.S. Department of Alcohol, Tobacco, Firearms and Explosives, smugglers can net as much as $23,000 from a single carload of cigarettes, $90,000 from a van load and $465,000 from a U-Haul loaded with cigarettes and transported from a low-tax state to a high-tax state. The higher the tax in the state where the smugglers unload the cigarettes, the greater the profit.

Federal authorities have traced smuggling profits to terrorist organizations in the Middle East, and cigarette smuggling has been tied to a number of other serious crimes such as truck hijackings, cigarette and tax stamp counterfeiting, and violence against police officers and innocent citizens. As tax increases inflate the value of stolen cigarettes, convenience stores become more profitable targets for thieves — particularly those who favor the smash-and-grab technique, using vehicles, usually stolen, to enter stores through the plate-glass windows.

There’s a price to be paid for higher cigarettes taxes, and it’s not just smokers who pay.

source: mercurynews.com

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