Revenue up in smoke

Tobacco smuggling and counterfeit cigarette tax stamps are crimes that generate hundreds of millions of dollars for criminal enterprises and terrorist organizations.

A recent Herald editorial suggested that Gov. Deval Patrick’s recommendation for a more sophisticated black market cigarette tracking system is a “solution looking for a problem” that represents “pork barrel” spending. Additionally, opponents argue that there is not enough evidence of smuggling to warrant the investment in anti-counterfeit cigarette stamp technology.

But nothing could be further from the truth. In fact, even a cursory review of the voluminous evidence compiled by the FBI; the Division of Alcohol, Tobacco and Firearms; the Government Accountability Office; the U.S. Attorney’s office and investigators and regulators at the state level reveals a cigarette smuggling problem that is exploding.

Going back to 2004, an ATF bulletin reads that there were “more than 300 open cases of illicit cigarette trafficking, up from only a handful a few years ago.” A recent ATF report claims that the number of cases has more than doubled in the last five years. In fact, cigarette diversion and tax stamp fraud are growing so rapidly that ATF last year decided to establish a new branch within its ranks that will do nothing but investigate cigarette diversion on a nationwide basis.

Tobacco smuggling and counterfeit cigarette tax stamps are crimes that generate hundreds of millions of dollars for criminals, criminal enterprises and terrorist organizations. “The schemes” according to then ATF Director Carl Truscott, “provide terrorists millions of dollars which can be used to purchase firearms and explosives to use against the United States and others.”

And those millions come at the expense of state revenues. In California, the first state to implement this type of detection technology like the one being proposed for Massachusetts, tobacco tax collections increased a whopping $100 million in the first 20 months after implementation – without raising taxes. And the problem is not just on the West Coast. A December 2008 report by the Mackinac Center for Public Policy found that in 2006 “New Jersey, Maine and Massachusetts had the highest commercial [cigarette] smuggling import rates in the nation,” with 25.4 percent of Massachusetts’ total cigarette consumption being contraband. That would mean about $127 million in Massachusetts taxes are going uncollected.

It’s just good public policy to utilize current technology to protect this huge revenue stream ($500 million) for Massachusetts. If the new system recovers a mere 25 percent of the smuggling, that would be almost $32 million recovered of the estimated $127 million loss. This money could be used to offset government deficits, fund critical government programs or provide tax relief in other areas.

The Massachusetts Department of Revenue and the Patrick administration, to their credit, recognize that the state’s antiquated 1950s system can’t effectively detect or deter counterfeiting without a viable detection system. The sophistication of smugglers far outpaces the technology we currently utilize to catch them.

Though technology exists to decrease counterfeiting, increase state revenues and increase our ability to track down smugglers, it is often opposed by special interest groups that brazenly claim that there is no problem, contrary to all evidence.

Finally, consider this: Printing tax stamps is just like printing money. When the U.S. Treasury implemented changes to the way it prints money, it went high tech. It did so to defeat the criminal elements that counterfeit money. The same holds true with tax stamps, as states and elected officials turn toward technology to address this problem with a cost-effective solution resulting in good public and fiscal policy.
Bob Fromme is a senior consultant for the Combating Terrorism Center at West Point. He has also testified as a paid expert witness on behalf of a company that makes counterfeit detection equipment.


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