According to the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), an estimated $7 and $10 billion is lost in federal and state tax revenue annually due to cigarette smuggling, which is astounding considering that total federal and state tobacco tax collections were about $32 billion in 2013. This means that as much as a quarter of all tobacco tax revenue is being lost each year.
One of the biggest drivers of the extensive cigarette smuggling is the substantial differences in state excise taxes. For example, Virginia's state tax is only 30 cents on a pack of 20 cigarettes, whereas New York’s combined state and city excise tax is 19.5 times higher at $5.85 per pack. From a practical perspective, this means that an individual could evade $166,500 in tobacco taxes by simply buying up 50 cases of cigarettes in Virginia, driving them to New York City and then illegally reselling them to retailers in the city.
While some level of smuggling may be inevitable due to the high profitability of this enterprise, the good news is that there are a host of simple measures that state governments can take to combat the flow of cigarette smuggling, including simply increasing the quality of tobacco tax stamps and better record keeping by retailers. Lawmakers in Virginia and Maryland, for instance, have already started to crack down on cigarette smuggling by stepping up enforcement and increasing criminal penalties on smugglers.
On the federal level, Rep. Lloyd Doggett has proposed the Smuggled Tobacco Prevention (STOP) Act, which would require unique markings on tobacco products for tracking purposes, ban the use of tobacco manufacturing equipment to unlicensed persons, require better disclosure by export warehouses and increase the penalty on tobacco smuggling offenses. Taken together, these measures provide the critical framework needed for federal and state authorities to significantly stem the flow of cigarette smuggling.
Taking a step back, it's important for state and federal lawmakers to remember that tobacco taxes are most useful as a mechanism to discourage smoking, rather than a particularly desirable revenue source given that they are regressive and the amount of revenue they generate declines over time. Still, allowing tax evasion to erode this revenue source at the state and federal level is simply unacceptable.