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Taxes Drive Cigarette Smuggling

The economists have a word for it – “arbitrage.” It’s when a product is cheaper in one location than another and profits accrue simply by moving the item around. For New York, this means cigarettes from southern states with lower taxes.

On example, from the ATF in 2009, involved smuggling from West Virginia into New York – to the tune of 388,000 cartons of smokes. The ring busted included 14 people and a transaction that included buying smokes with $8 million in cash, 40 firearms, and drugs.

More recently, Congressman King (NY Second District) talked about a case where $55 million worth of smokes were part of an operation linked to terrorist financing. “The defendants, who face charges including money laundering and conspiracy, made so much money that when one of the alleged ringleaders, Basel "Abu Salah" Ramadan, 42, of Ocean City, Md., was arrested Wednesday, investigators found more than $1.4 million in cash in his house stuffed in black plastic garbage bags, Schneiderman said.”

Smugglers are attracted to cigarette smuggling because it’s less risky than drugs and the penalties are lower. Where an arbitrage situation exists, cigarettes can be purchased legally in one state and shipped into another. Retailers seem eager to snap up cigarettes at a discount as well.

Per pack taxes on cigarettes are only 55 cents in West Virginia. In New York, we tack on more than $4 a pack. Even halving the potential profits between the two tax rates will yield a smuggler $17 a carton, giving the retailer the other $17. A semi-truck trailer full of cigarettes can then bring many thousands of dollars in profits.

Recent news reports give an idea of just how much money is kicking around in cigarette smuggling. The ATF has been accused of letting $162 million slip through in stings that went wrong, bad accounting, or by taking confiscated funds for their own operations. An estimated 420 million cigarettes have gone “missing.”

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