By Darren Smith, Weekend Contributor
With many states grappling with the need for tax revenue and the otherwise laudable effort to curtail cigarette smoking among their citizens, laws of supply and demand are beginning to having unexpected consequences to some. Rises in taxation of cigarettes with prices in one location as high as $15.00 per pack, the majority of cigarettes consumed by smokers there are now bootleg. According to the U.S. Bureau of Alcohol, Tobacco, Firearms, and Explosives, nearly $5 billion in revenue in 2010 was lost because of smuggling. But this figure is very likely to rise dramatically since many states since enacted even higher levels of taxation.
The situation has formed a fertile ground for illegal cigarette trafficking and there have been inroads into organized crime. Sources of illegal cigarettes have been neighboring states where tax rates are lower, Native American reservations, and even foreign sources of the same brand names, often from Vietnam, Thailand, and Eastern Europe. Wholesale illegal supply chains are becoming increasingly significant. While cigarettes are otherwise available, albeit at a higher price, these states are beginning to see a softer form of prohibition. But there is also a very dark side to smoking bootleg cigarettes. Illegal cigarette trafficking has been used as a vehicle to channel money to foreign terrorist organizations. Are the benefits worth the costs inherited from high taxations?
According to the non-partisan research group Tax Foundation, increased excise taxes on cigarettes to discourage smoking have, in fact, created lucrative incentives for black market trafficking between states. According to their report, 56.9 percent of the cigarettes sold in the Empire State are brought in from other states. New York State has the highest cigarette taxes in the country – a whopping $4.35 a pack. If you live in New York City, it’s another $1.50 per pack, bringing taxes to $5.85 per pack, with the overall cost of a pack in the city in the $12 to $15 range.
Arizona is the country’s second largest net importer of smuggled smokes with 51.5 percent of its cigarettes smuggled in illegally. New Mexico follows at 48.1 percent, Washington at 48 percent and Wisconsin at 34.6 percent, according to the survey.
The states which had the highest outbound smuggling rates were New Hampshire at 24.2 percent, Wyoming at 22.3 percent, Idaho at 21.3 percent, Virginia at 21.2 percent and Delaware at 20.9 percent.
Enforcement is often lax and under-funded on the state and local level. Yet a semi-truckload of bootleg cigarettes can bring in nearly three million dollars in illicit profits. With easy availability on a wholesale level and unlike drugs such as heroin are a legal substance, it is often more attractive than drug or weapons smuggling.
It can be said that nearly all of the end users of these bootlegs are ordinary smokers who want to buy their product at a lower price, and they are not necessarily otherwise the stereotype of a contraband user, it is the supply side that is has a insidious nature. This is not limited to profiteers, but according to the BATFE and FBI reports, terrorism is now cashing in on the racket.
The first large-scale cigarette trafficking case tied to terrorism was prosecuted in North Carolina in 2002. A federal jury in Charlotte convicted Mohamad Hammoud, 28, of violating a ban on providing material support to terrorist groups by funneling profits from a multimillion-dollar cigarette-smuggling operation to Hezbollah.
The jury also found Hammoud, whom prosecutors described as the leader of a terrorist cell, and his brother guilty of cigarette smuggling, racketeering and money laundering. The two men, natives of Lebanon, were accused of smuggling at least $7.9 million worth of cigarettes out of North Carolina and selling them in Michigan. Hammoud was sentenced to 155 years in prison.
Prosecutors were able to prove that profits from the venture were funneled to high-ranking Hezbollah leaders. And Hammoud was caught on wiretaps speaking on the telephone with Hezbollah’s military commander in Lebanon, Sheik Abbas Harake, according to trial testimony.
In another case in September, Hassan Moussa Makki, 41, a key player in a multimillion-dollar interstate cigarette smuggling ring, pleaded guilty in Michigan to providing material support for terrorism and participating in a racketeering conspiracy. Prosecutors said he also funneled money to Hezbollah. Makki, a native of Lebanon, was one of 12 people indicted last year in the scheme to buy low-tax cigarettes in North Carolina and sell them in Michigan. He was sentenced to 57 months in prison.
While it is certainly unfair to label a tax evading smoker as an indirect supporter of terrorism and organized crime, most are probably unaware of this link. It is time for state legislatures to see beyond the current tax revenue addiction of tobacco and focus on alternative approaches.
By Darren Smith
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