Black Market Boom if Californians Pass Cigarette Tax Hike: Study

Published December 1, 2006

An inevitable surge in black market activity and related crime would accompany passage of California’s Proposition 86 on November 7, according to a new study by a Washington, DC-based taxpayer group, the Tax Foundation.

“California law enforcement will be grateful if the proposition is defeated,” predicted Tax Foundation Chief Economist Patrick Fleenor, author of Special Report No. 145, “California Schemin’: Cigarette Tax Evasion and Crime in the Golden State,” released October 5.

“The state with the highest cigarette tax is the preferred destination of every cigarette smuggler, and the potential profits are enormous,” Fleenor said.

“Even now, with an 87-cent tax per pack, several tractor trailers full of cigarettes roll into California every day, and Internet sales are booming,” Fleenor continued. “If the tax goes to $3.47 per pack, the black market will boom, and a lot of serious crime will boom with it.”

Previous Crime Increase

In 1998, Californians raised their cigarette tax from 37 cents to 87 cents per pack. Californians saw increases in three types of crime associated with the cigarette tax:

  • cross-border shopping for low-tax cigarettes by California smokers over the road or the Internet;
  • large-scale smuggling by organized criminals; and
  • ancillary crimes committed in the state.

According to the California Board of Equalization (BOE), which is charged with enforcing the collection of cigarette taxes, some 300 million packs of cigarettes are brought into the state each year and sold without paying California taxes. Despite requiring elaborately printed tax stamps to be affixed to each pack, the BOE has been at pains to stop counterfeiters and smugglers.

Robbery, Kidnapping, Murder

“Armed robbery, kidnapping, and even murder are committed because of the cigarette smuggling trade,” Fleenor reports, “all because of a hard-to-enforce tax that dangles easy money in front of the criminal element.”

The California BOE estimates cigarette tax evasion has leveled out and even diminished slightly in recent years, as California’s tax has stayed at 87 cents and other states have raised their taxes and made themselves better smuggling targets.

Fleenor’s report traces the bizarre history of cigarette taxes and crime in California.

The first large state tax imposed in 1998, Fleenor notes, sent customers scurrying to military bases and Indian reservations. Now, his study notes, shipping containers filled with counterfeit cigarettes are unloaded at the ports of Long Beach and Los Angeles, and Web-based foreign firms promise to defy tax authorities and ship tax-free cigarettes directly to customers in unmarked packages.

Brian Phillips ([email protected]) is manager of media relations at the Tax Foundation.

For more information …

“California Schemin’: Cigarette Tax Evasion and Crime in the Golden State” is available online at