With a cigarette tax of $2 a pack, fourth-highest in the nation, after another increase took effect on July 1, Michigan has been making a name for itself as home to smugglers and other scofflaws of the tobacco tax.
Because most other states have lower tobacco taxes, there is a price differential between most other states and Michigan. Turning that differential into profit has become the goal of criminal enterprises that smuggle cigarettes into Michigan and other high-tax states, selling the smokes tax-free.
$1 Million Bust
This past April a Jordanian-born resident of Dearborn, Michigan was seized by Ohio authorities in connection with illicit tobacco trafficking. Tobacco products valued at more than $1 million were confiscated as part of the arrest. Police believe he planned to sell his products in Michigan.
In May, four residents of Windsor, Canada were charged in Ontario courts with smuggling and possession of unstamped tobacco products (cigarettes are often marked with a stamp from the area where they were sold, to prove taxes have been paid on them). According to a Canadian Newswire report, officials believe “approximately 642 cases of tobacco were smuggled into Canada” from Michigan, suggesting Michigan may now be a distribution hub for cross-border smuggling.
Those are by no means the first tobacco-related smuggling arrests involving Michigan. In 2002, two cigarette smugglers were arrested in an FBI sting. The duo were driving vans of illicit cigarettes from North Carolina to Detroit and allegedly using portions of their profits to subsidize Hezbollah, a terrorist organization in Lebanon with possible links to al-Qaida.
An associate of one of those smugglers, a resident of Dearborn, was arrested in a different operation. He pleaded guilty to smuggling as much as $72,000 worth of illicit tobacco each month to Michigan. According to the U.S. Department of Justice, he gave a portion of his profits to an “orphans of martyrs program” run by Hezbollah to help the relatives of those killed in the group’s terrorist operations or by its enemies.
Nor is smuggling the only issue. In October 2004, the Detroit News reported a truck holding 135 cases of cigarettes worth more than $27,000 was hijacked in Washtenaw County, Michigan. The truck driver was reportedly pistol-whipped and blindfolded during the assault. According to the Washtenaw County Sheriff’s Department, that was the second cigarette-related hijacking in that county since 1998.
Theft is not limited to the cigarettes themselves. In 1997, the Michigan legislature responded to concerns over illicit cigarette sales by passing a law requiring that stamps be placed on all cigarette packages bought and sold in the state. In September 2000, the state obtained a felony charge against a suspect from Ypsilanti, Michigan who was found in possession of 650 Michigan tax stamps believed to have been stolen from a wholesaler.
Michigan began a series of large cigarette tax increases in the 1990s, raising the incentive for illicit trafficking. In 1994 the state raised its 25 cent cigarette tax to 75 cents per pack–a 200 percent hike. Taxes were increased by an additional 50 cents per pack in 2002. The most recent increase took effect July 1, 2005. That was a 75 cents a pack hike, taking Michigan’s cigarette tax to its current $2 a pack.
Michael D. LaFaive ([email protected]) is director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute in Midland, Michigan.