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Tobacco tax differential encourages smuggling, organized crime

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New York state has the highest inbound cigarette smuggling rates in the country according to recent research by the Mackinac Center for Public Policy in Michigan. 

Well over half of all cigarettes smoked in the state are illegal, and smuggling has increased by almost 60% since 2009.

The wide variation of taxes across different states is also encouraging illegal trafficking, according to Scott Drenkard, an economist with the non-partisan Tax Foundation.

“Because the taxes are so high, it’s almost as if the products are illegal, and you get the same kind of activities you got when alcohol was illegal in this country. Formal crimes rings, sometimes involving public safety officers that are built into the crime ring and help it function better, and huge profit margins to be had by people that are operating in the black market.”

Drenkard says that the state’s that tend to have more stable revenues from tobacco, are the ones with lower excise rates on those products.

New York has the highest state cigarette tax rate in the country, $4.35 a pack, with an additional $1.50 excise hiked onto cigarettes sold in New York City.

The wide tax differential across the country provides a strong incentive for organized crime, says Drenkard.

“In Virginia, an analysis by Crime Commission found that you could make four million dollars in profits if you can get a 16-wheeler filled with tobacco from Virginia and then sold in New York City, so the profit margins are really quite shocking.”

Drenkard says lower level smuggling, where travelers pick up a carton or two for friends or family, is also very common.

On Monday, Governor Cuomo announced the formation of a new Strike Force to address the flow of untaxed and counterfeit products into New York.

The Tax Department’s Criminal Investigations Division will lead the coalition of agencies.

The state is currently party to a Federal lawsuit against the carrier Fedex over illegal cigarette shipments into New York between 2006 and 2012.

State Excise Tax Rates on Cigarettes