RI Black Market Tobacco Sales Rampant, Among Worst in Nation

Monday, December 23, 2013


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Up to 40 percent of cigarettes smoked in Rhode Island are smuggled into the state according to one estimate.

That analysis comes from the Mackinac Center for Public Policy, a nonpartisan research group that draws a direct correlation between tobacco taxes and the drug's illicit distribution.

The organization says Rhode Island ranks 5th in the nation in sales of smuggled cigarettes.

“We cannot speak for the institute or its survey,” responded state Tax Administrator David Sullivan. “However, based on our own investigations, we know that contraband cigarettes are a problem in a number of states, including Rhode Island.”

The head of the Division of Taxation went on to say that the state had taken proactive steps to combat the problem. “Thanks to this concerted, multi-agency effort, we are making real progress in cutting the flow of contraband cigarettes into Rhode Island.”

The city of Providence's Healthy Communities Office cites the Mackinac study in response to current proposals to “tax and regulate” marijuana along the same lines as tobacco.

But the national Campaign for Tobacco-Free Kids calls the notion of tobacco taxes promoting black markets a “cigarette company myth”.

“The Mackinac Center's recent report is based on seriously flawed methodology,” said the campaign's Vince Willmore, adding the report was “intended to help tobacco companies fight tobacco tax increases rather than to provide factually accurate information about cigarette smuggling.”

Comparing reported smoking rates to sales

The Michigan-based, conservative-leaning Mackinac Center has identified tobacco smuggling in the contiguous United States every two years since 2008. The latest study released this year includes data from 2011.

“State and local levies have grown so onerous in some parts of the country that they almost could be called 'prohibition by price,'” contend study authors Michael LaFaive and Todd Nesbit in a release.

The center's statistical model compares actual legal sales against predicted consumption based on reported smoking rates. The difference represents the estimated amount of smuggled cigarettes.

Contraband tobacco comes from out of state in a variety of ways, including unreported online sales, “casual” smuggling by individuals, or by commercial enterprise.

Division of Taxation response

Amy Kempe with the Rhode Island attorney general's office said she couldn't comment without better information about the institute's methodology.

“Since we cannot verify the data they cite, we are not going to make comment,” she said this week, referring an inquiry by GoLocal to state tax officials.

Sullivan said a number of smuggling operations involving contraband cigarettes had been “stamped out” through the work of agencies including the Division of Taxation's Special Investigation Unit, state police, and attorney general's office.

“Our own investigations have worked — and continue to work — to stop a number of local retailers from selling contraband cigarettes,” he continued.

Sullivan said the General Assembly had approved a plan this year that creates a special investigations unit specifically to combat contraband cigarette sales. “The unit will allow the Division of Taxation to more efficiently and effectively identify, monitor, and quantify tax fraud and related activity,” he said.

“The word is out on the street that we will not tolerate the illegal sale of contraband cigarettes.” Sullivan noted that state Attorney General Peter Kilmartin presented the Justice Award last year to six taxation division employees for their efforts in cracking a multi-state cigarette-smuggling ring.

The issue has also captured the attention of legislators in nearby Massachusetts, where an Illegal Tobacco Commission was included in the fiscal year 2014 state budget to study the economic impact of the illegal tobacco trade.

That commission first convened in late October and is expected to issue its findings by March of next year. The Mackinac Center estimates one in five cigarettes was smuggled into the Bay State in 2011.

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Center: contraband correlation with tax rates

Rhode Island, with the second-highest tax rate on a pack of cigarettes in 2011, had the fifth highest rate of smuggled cigarettes according to the center.

New York held the top position as the highest net importer of smuggled cigarettes, under the institute's analysis, with contraband cigarettes totaling 60.9 percent of the total market. “Not coincidentally, New York also has the nation's highest state cigarette tax,” LaFaive and Nesbit write in this year's release.

The consequences, they said, include corruption, violence, theft, and counterfeiting.

Smuggling “overinflated” by big tobacco

But the topic is a red herring according to the Campaign for Tobacco-Free Kids.

“Massachusetts and Rhode Island are on the right track with tobacco taxes,” said the campaign's Willmore.

“We agree that cigarette smuggling is a problem that should be addressed, but Mackinac has consistently overinflated how much smuggling is occurring,” he continued, calling tobacco tax increases “one of the most effective ways to reduce smoking.”

According to the campaign, tax hikes have universally resulted in increased state revenue, as well.

“Because (tobacco companies) can't dispute that key fact, the industry makes — and funds others to make — misleading arguments to distract the debate from the real issue.”

Around New England

Elsewhere in New England, the institute estimated 22 percent of cigarettes in Connecticut were smuggled into the state, while that percentage was nearly 14 for Maine.

New Hampshire and Vermont, states with comparatively low tobacco taxes, were net exporters of illegal cigarettes, with nearly 27 percent and 17 percent of cigarette sales ultimately leaving the state, respectively.

According to Willmore, “the best solution to the problem of interstate cigarette smuggling is for low-tax states, such as New Hampshire, to increase their cigarette taxes.”

Such a step would produce health benefits in those states while reducing smuggling and tax evasion, he said, identifying other steps states can take like “high-tech tax stamps” that allow for easy identification of legal cartons by law enforcement.


Related Slideshow: Black Market Cigarettes in New England

Scholars at Michigan's Mackinac Center for Public Policy have analyzed tobacco sales data to estimate smuggling rates for each state.

The report uses 2011 data and finds that smuggling rates generally rise in states after they adopt large cigarette tax increases. Smuggling rates have dropped in some states, however, often where neighboring states have higher cigarette tax rates.

This means that people are buying cigarettes in lower-taxed states legally, and bringing them into nearby higher-taxed states to sell at a lower price with higher profits.

See which New England states have the highest percentage of smuggled cigarettes in the slides below:

Source: Mackinac Center for Public Policy; Tax Foundation.

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6. New Hampshire

National Rank (1 is Most): 47

2011 Consumption Smuggled*: -26.8%

2006 Consumption Smuggled*:-29.7%

2011 Cigarette Tax Rate (Per Pack): $1.68


*Positive is inflow (smuggled in), Negative is outflow (smuggled out)

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5. Vermont

National Rank (1 is Most): 40

2011 Consumption Smuggled*: -16.9%

2006 Consumption Smuggled*: 4.5%

2011 Cigarette Tax Rate (Per Pack): $2.24


*Positive is inflow (smuggled in), Negative is outflow (smuggled out)

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4. Maine

National Rank (1 is Most): 23

2011 Consumption Smuggled*: 13.7%

2006 Consumption Smuggled*: 16.6%

2011 Cigarette Tax Rate (Per Pack): $2.00


*Positive is inflow (smuggled in), Negative is outflow (smuggled out)

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3. Massachusetts

National Rank (1 is Most): 19

2011 Consumption Smuggled*: 18.1%

2006 Consumption Smuggled*: 17.5%

2011 Cigarette Tax Rate (Per Pack): $2.51


*Positive is inflow (smuggled in), Negative is outflow (smuggled out)

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2. Connecticut

Overall Rank (1 is Most): 14

2011 Consumption Smuggled*: 22.2%

2006 Consumption Smuggled*: 12.3%

2011 Cigarette Tax Rate (Per Pack): $3.00


*Positive is inflow (smuggled in), Negative is outflow (smuggled out)

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1. Rhode Island

Overall Rank (1 is Most): 5

2011 Consumption Smuggled*: 39.8%

2006 Consumption Smuggled*: 43.2%

2011 Cigarette Tax Rate (Per Pack): $3.46


*Positive is inflow (smuggled in), Negative is outflow (smuggled out)


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