The Wall Street Journal reports that cash-strapped states are beginning to crack down on cigarette smuggling, a practice that basically involves legally purchasing cigarettes in a low-tax state, then reselling them tax-free in places like New York, where smokers pay $4.25 in taxes per pack. So how's that working out for our elected officials? The Journal says it's costing taxpayers big time:
In one recent case, an undercover investigation by the New York State Department of Taxation and Finance led to the arrests of 18 residents of Nassau and Queens counties. Investigators from the tax department posed as cigarette bootleggers and sold illegal, untaxed cigarettes to a network of store owners, including two 7-Eleven operators. The operation cost state and local governments $2.1 million in uncollected taxes.
A similar incident took place in Fairfax, Virginia when police arrested two men accused of attempting to distribute cocaine. The suspects were caught trying to exchange one kilogram of cocaine with an undercover agent for 3,000 packs of cigarettes. "They were willing to trade cocaine for cigarettes," Edgar Domenech, head of the Bureau of Alcohol, Tobacco, Firearms and Explosives, told the Journal.
What we have here is a classic lose-lose situation. Levying high taxes on a popular commodity like cigarettes creates not only a black market, it also turns otherwise innocent people—who are just trying to circumvent an oppressive and confusing tax system—into criminals. Furthermore, cracking down on these criminals involves a whole slew of other resources (courts, police, etc.) that drain government funds.
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Increasing taxes on cigarettes has become a popular option for states in the struggling economy, but doing so won't be the answer to budget woes. Indeed, with smokers in some states apparently valuing cigarettes more than cocaine, I'm guessing the smugglers aren't going anywhere—except maybe jail, that is. Reason coverage of cigarette smuggling in 1995 here.