New York Gov't Encourages Growth of Organized Crime

The big news from New York today is that a new cigarette tax has become mandatory. As Paul Merrill reports for Albany TV station WXXA:

A statewide tax increase of $1.25 per pack of packaged cigarettes went into effect on Tuesday, bringing the total tax on a pack of cigarettes in New York State to $2.75.

The increase is estimated to bring the state's total tax revenue from cigarettes to approximately $1.3 billion.

That total is not increasing directly proportionally to the tax increase per pack because the state realizes many smokers will find other ways of getting their cigarettes or simply kick the habit altogether.

A pack of cigarettes in the Capital Region now costs about $6.

Additional taxes in New York City put the cost of a pack of cigarettes there closer to the $10 mark.

Some argue that this latest tax increase will push smokers to Native American stores, the Internet, or bootleggers who transport cigarettes across state lines.

We'll get back to that last point momentarily. But Jon Dougherty of WTVH-TV in Syracuse notes another effect (the grammatical error in the first sentence is his, not mine):

The average price of a pack of cigarettes is pushing $7.00, and independent smoke shop owners are seeing less customers because of it. Smokers buying cigarettes will have to pay up to $2.00 more per pack. At Tobacconist in Armory Square, a pack that cost $5.00 yesterday, will cost you over $6.50 today. The owner says that's going to hurt business.

A few blocks away, smokers were hesitant to buy cigarettes at the Downtown Smoke Shop in Syracuse today. The higher price left business slower than normal.

Smoke shop owners are afraid of losing customers to Indian Reservations, where there are no taxes on cigarettes. We spoke to the Onondaga Nation Smoke Shop. They say they've received more phone calls from customers wanting to know their price for cigarettes. The store sells pack $2.00 to $3.00 cheaper than in the city. For small smoke shops, that's hard to compete with.

While smoke shop owners off the reservation might be sad and smoke shop owners on the reservation might be glad, those laughing most heartily today are mobsters and terrorists who rely on cigarette smuggling for large portions of their tax-free, cash income.

It's not like this effect is unknown. I wrote about it more than a decade ago for The Metro Herald, which published the following article on April 17, 1998:

Higher Cigarette Taxes Set Stage for New Crime Wave
Richard E. Sincere, Jr.

(Arlington, Va.) --- The proposed federal settlement with the tobacco companies -- now in limbo as the tobacco companies have, at least for the moment, backed out -- includes a provision that federal excise taxes on cigarettes will rise from $1.10 (the congressional proposal) to $1.50 (the president's preference) a pack over the next several years. Experience in many states and foreign countries teaches us that such a tax increase will lead to more cigarette smuggling by organized criminals, with the likelihood of gang violence as various crime syndicates battle for "turf" in the contraband cigarette market.

In congressional testimony last December, Robert A. Robinson of the General Accounting Office (GAO) reported that "smuggling cigarettes from low- to high- tax states, or interstate smuggling, prominent in the 1970s, may now be a reemerging problem . . . In fact, recent estimates suggest that smuggling is responsible for states collectively losing hundreds of millions of dollars in annual tax revenues." The problem is also international in scope, as Robinson explained:

"International smuggling has occurred recently between Canada and the United States. According to the Canadian government, sharp increases in Canadian federal and provincial cigarette taxes in the late 1980s and early 1990s led to large-scale smuggling between the United States and Canada conducted almost entirely by organized crime. Violence increased, merchants suffered, and in one year alone, Canada and its provinces lost over $2 billion (in Canadian dollars) in tax revenues. Canada responded in 1994 by sharply reducing federal and provincial cigarette taxes . . . Since then, smuggling has declined considerably."

Writing in Reason magazine in 1995, Ed Carson explained how Canada's rising tobacco taxes set into motion the law of unintended consequences. "The result was an invitation to organized crime. Mohawk Indians from tribes along the U.S.-Canada border, biker gangs, and Asian Triads smuggled cigarettes across the border in boats, airplanes, trucks, legitimate courier companies, and snowmobiles. By the end of 1993, nearly one in three cigarettes was contraband."

In February of this year, Erin Schiller of the Pacific Research Institute noted the perverse, unexpected effects of Canada's cigarette tax. Despite the steep tax hike, Schiller wrote in the Washington Times, "youth smoking did not decrease and many officials ironically argued that high taxes made it more difficult to control youth smoking."

How could this be? Notes the GAO, "According to the Canadian Prime Minister, as the portion of the Canadian market supplied by smuggled tobacco increased, the average price paid for cigarettes dropped. Access to cheap contraband tobacco undermined the government's health policy objectives of reducing tobacco consumption, particularly among youth."

In perhaps the most delicious irony, U.S. college students living near the Canadian border made a practice of going on "drinking holidays" to Canada, where the drinking age is lower. To pay for their vacations, they would take carloads of low-priced U.S. cigarettes to sell or trade for liquor.

Canada is not alone. Washington Times correspondent Erik Kirschbaum reported in early 1996 that a similar smuggling problem was occurring in Germany. Cigarette smuggling led to "a surge in gangland-style executions and turf wars [that] made Berlin streets more dangerous than at any time since World War II," he wrote. "Authorities fear that cigarette trafficking is leading to crime empires dealing in extortion, prostitution, stolen cars, drugs, and weapons." Kirschbaum quoted a Berlin police detective as saying that "people are being executed in cold blood in their apartments and in broad daylight on the streets, on subway platforms, in front of hundreds of witnesses."

Weeks later, Paul Geitner reported in USA Today that "turf battles between the Vietnamese gangs that control street-level sales have been blamed for the deaths of 40 Vietnamese, 15 in Berlin alone [in 1996]." These killings, he said, are "the latest episode in a bloody gang war over Berlin's lucrative trade in smuggled cigarettes." The reason? Just one truck loaded with 50,000 cartons can net a smuggler $550,000 in profits.

According to former Treasury Department official Bruce Bartlett, all across Europe, high taxes are resulting in a bonanza for smugglers. "One-fourth of the world's cigarettes are now smuggled across national borders to evade taxes and tariffs," he wrote last August. "Governments are already losing $16 billion per year in tax revenues -- a figure likely to rise as organized crime becomes a larger player in the business of smuggling smokes. In Italy alone, organized crime is said to make $500 million per year smuggling cigarettes."

As long as tobacco remains a legal commodity, efforts to control its consumption through regulation or taxation are doomed to fail. This was the case during the blundering "noble experiment" of alcohol prohibition, when possession of alcohol was legal but the sale and importation of it were not. This created an instant black market for criminal kingpins like Al Capone and Joseph P. Kennedy, giving birth to organized crime in this country. With excessive cigarette tax rates, the Mob will have just one more outlet for criminal entrepreneurship.

It's obviously time to rethink the tobacco settlement -- particularly the misguided idea of raising cigarette taxes.

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Richard Sincere, a nonsmoker, chairs the Virginia chapter of the Republican Liberty Caucus (www.rlc.org).

If you think the link between cigarette smuggling and terrorism -- a more salient issue today than in 1998 -- is nebulous, consider what Jim Waters of the Bluegrass Institute, a think tank based in Kentucky, wrote in the Times-Tribune on May 9:

The notion that cigarette smuggling, driven by higher taxes, created a big-enough business to fund terrorists seemed goofy.

But the truth here is at least as strange as the fiction. A report released April 29 by New York Rep. Peter King shows how terrorists benefit from high cigarette taxes.

“In total, law enforcement officials in New York state estimate that well-organized cigarette smuggling networks generate between $200,000 (and) $300,000 per week,” the report stated. “A large percentage of the money is believed to be sent back to the Middle East, where it directly or indirectly finances groups such as Hezbollah, Hamas and al Qaeda.”

Two primary strategies used by these smugglers of terror involve either smuggling cigarettes from other states with much-lower taxes. Or they make peace with Indian reservations, where cigarettes aren’t taxed.

James Damask wrote for the Mackinac Center that “fully one-fourth of all cigarettes sold worldwide are now smuggled from low-tax areas to high-tax areas to reap the criminal’s reward for government intervention in matters best left to the private sector.”

These activities are not limited to North America, with funds going to the Middle East, either. Consider this story from Sunday's Moscow Times (that's Moscow, Russia, not Idaho):

Bulgaria, an EU newcomer under pressure from the bloc to clean up its act, said Friday that it had broken up on a criminal network suspected of financing rebel groups in Chechnya.

The gang of mainly Chechens was involved in racketeering, blackmail, arms deals, money laundering and cigarette smuggling, the national security agency said in a statement. "The group is suspected of financing terrorist formations in Chechnya," it said.

Cigarette smuggling has been a staple of organized crime activity in the Balkans for years, perhaps predating the fall of the Soviet Union and the break up of Yugoslavia. The Organized Crime and Corruption Reporting Project titled one of its recent reports "Cigarette Smugglers Trade in Murder" and began it by saying:

In the Balkans, death and cigarettes are closely related.But it's not always the carcinogens that are the problem.

The illegal tobacco trade takes its share of lives.

High-profile killings connected to illicit tobacco networks in the Balkans have claimed journalists, intelligence officers, politicians and the criminals themselves. In the fight to control this multi-billion dollar criminal enterprise, gangsters often use the most ruthless methods to assert their authority and send a reminder of their power to the public at large.

In one of the more chilling examples of cigarette smugglers' disregard for life, Dusko Jovanović was shot and killed outside the paper he worked at in Montenegro, a regional cigarette smuggling hub. The then editor-in-chief of Dan, the Montenegrin daily, was gunned down in 2004 shortly after publishing a series of articles on the illicit tobacco smuggling activities of underworld kingpins.

The killing was among the most vicious in a particularly bloody period in the recent history of Montenegrin cigarette smuggling. It followed the slaying on May 30th, 2000, of Goran Zurgić, a security advisor to then Montenegrin president Milo Đukanović. Zurgić, at the time cooperating with western intelligence agencies investigating Đukanović’s business dealings, was believed to be murdered by Darko Raspopović, then head of Montenegro’s anti-terrorism unit at its Interior Ministry. Raspopović himself was shot and killed in Podgorica the following January.

Those are just a few examples of how cigarette smuggling -- which is done almost entirely to avoid tariffs and taxes, since tobacco is a legal product in most countries -- benefits the mob.

Raising taxes on cigarettes may serve some short-term goals, such as increasing revenues for governments to misspend, but in the long run, it causes more harm than good.