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How Will Massachusetts Combat Black Market Tobacco Sales?

Saturday, February 08, 2014

 

Cigarette smuggling costs states millions and fuels terrorism abroad, but enforcement efforts are about to be stepped up in Massachusetts.

The state's Illegal Tobacco Commission expects to issue final recommendations March 1 to tamp down on trafficking.

“People know it's a growing problem,” said Massachusetts Department of Revenue spokesperson Ann C. Dufresne. That department's commissioner, Amy Pitter, estimates that anywhere between 8 to 27 percent of cigarettes statewide are smuggled, resulting in an loss of revenue from $60 to $250 million annually.

Smuggling covers a range of activities from smokers shopping over state lines to organized crime rings. The black market is fueled in large part by dramatically different state-by-state tax rates. Last summer, Massachusetts increased its tax to $3.51 a pack — the second-highest rate in the nation. Spending a little extra on gas, a smoker can head to New Hampshire and pay half the tax ($1.78).

Response may include task force, stiffer fines and penalties

Stephen Ryan, the executive director of the New England Convenience Store Association, said serving on the commission had been an educational process. “The illegal trade certainly hurts the legitimate trade among retailers,” Ryan said.

“We're certainly looking at ways of leveling the playing field.”

Among the proposals the commission is considering: funding for a tobacco task force and increasing enforcement resources, an expansion of the state's stamping program to other tobacco products, and expanding data-gathering abilities to track tobacco throughout the supply chain.

Additional steps include increasing fines and penalties for violating state tobacco statutes, simplifying minimum tobacco pricing requirements so the laws are easier to follow, and changes to distributors' licensing requirements.

The commission is also looking at requiring the immediate license suspension and potential revocation for any person working in the supply chain caught selling or possession illegal tobacco or counterfeit stamps, and requiring the suspension of a retailer's lottery license in conjunction with any violation.

“We think having consequences that are substantial makes sense,” Ryan said. “Conceptually we're not against (stronger penalties).”

At its last meeting, Dufrense said the proposals were discussed and prioritized, “so the commission is now drilling down to its recommendations” heading into two final meetings later this month. With the issue receiving more attention from the public, lawmakers, and the executive branch, Dufresne said everyone was awaiting the final report.

Members of the state's working group include legislative and state appointees, a State Police representative, and the heads of two regional wholesale and convenience store associations.

More evidence of smuggling rings, smokers avoiding cigarette taxes

The latest corroborating evidence of widespread contraband tobacco in the Bay State comes from a “litter study” conducted by researchers from North Carolina's RTI International, who collected a random sample of littered cigarette packs in five U.S. cities last summer. Their analysis determined nearly 60 percent of the discarded packs didn't have the proper local tax stamp, including nearly 40 percent in Boston.

Those researchers estimated that the five cities (which also included New York City, Philadelphia, Washington, D.C., and Providence, R.I.) were losing out on a combined $680 to $729 million in cigarette tax revenue through trafficking.

The study follows recent research by the Michigan-based Mackinac Center for Public Policy that estimates one in five cigarettes in Massachusetts is smuggled into the state, avoiding its excise tax.

Trafficking fueled by risk-to-return ratio

The reasons for smuggling are easily understood: Cigarettes are small, legal to manufacture, and low risk to traffic.

Jeff Cohen, an attorney for the Bureau of Alcohol, Tobacco, Firearms and Explosives, told commission members earlier this month that cigarettes were potentially the largest trafficking operation worldwide involving a legal commodity. An estimated $100 billion is lost each year as a result, he said.

Examples of rings cited by Cohen before the commission included a $400 million-a-year online operation that mailed untaxed cigarettes from Europe, and a Hezbollah terrorist cell that trafficked cigarettes between North Carolina and Michigan.

A new Marlboro man

That latter operation involved cell members purchasing 299 cartons of cigarettes at a time (the legal limit without filing paperwork) and transporting between 800 and 1,500 cartons per trip.

But one of the most prominent international examples of tobacco smuggling by an identified terrorist group involves Algerian warlord Mokhtar Belmokhtar, whose moniker became “Mr. Marlboro” because of the role smuggling plays in funding his previously Al-Qaeda-aligned group. (Last year, the Associated Press reported a letter sent to Belmokhtar from Al-Qaeda's North African branch leaders that broke off ties for reasons including not picking up the phone or returning expense reports.)

Some doubt and unintended consequence to the sin tax

While higher so-called “sin taxes” on cigarettes in the U.S. are recognized and generally supported as an effective way to decrease consumption, a 2007 study by Michael Lovenheim at Stanford University's Stanford Institute for Economic Policy Research found that when smokers travel across state lines to purchase cigarettes (“casual smuggling”), they stock up — and end up smoking more.

Ryan said the state's commission was primarily focused on organized trafficking.

Responding to GoLocal on the issue of cigarette smuggling previously, the vice-president of communications for the Campaign for Tobacco-Free Kids said tobacco tax increases remained one of the most effective ways to reduce smoking.

“The best solution to the problem of interstate cigarette smuggling is for low-tax states (such as New Hampshire) to increase their cigarette taxes,” according to the campaign's Vince Willmore. “Such action would deliver significant health benefits to these states, while benefiting all states by reducing smuggling and tax evasion.”

 

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