King Op-ed: Feds burned by cigarette smuggling
Politico — by Rep. Peter King
As the U.S. economic downturn continues, no government budget across the nation, at any level, has been spared from cuts. New York state recently had to slash spending by billions. At the federal level, Congress has been forced to make historic cuts in spending. Increasingly, we are working to maintain security with fewer resources.
These challenging fiscal times demand that governments operate efficiently, in part by collecting taxes owed and cutting wasteful spending. Yet every day, the failure to strongly combat the growing crime of contraband cigarette smuggling deprives governments of billions of dollars in tax revenues — siphoned off by terrorist and criminal organizations.
Here’s how it works. Cigarette retailers – the corner store, for example — are required by law to buy cigarettes through a licensed wholesaler. That wholesaler must pay the state sales tax revenue — currently $4.35 per pack in New York.
However, as cigarette taxes have risen — in New York, for example, taxes have increased by more than $3.00 per pack in the last decade — store owners often bypass the wholesaler, acquiring and selling counterfeit-stamped cigarettes. This allows the smuggler and retailer to sell at substantial discounts — and still profit thanks to the margin created by unpaid taxes.
In New York, contraband cigarettes are typically trafficked from Southern states, which have lower or no taxes, or across federal tribal lands, where taxes are not collected. Tax-free cigarette sale on tribal lands, estimated to account for as much as one-third of all brand-name cigarette sales in New York, is supposed to be limited to tribal members. Nonetheless, some tribal lands import enough cigarettes to provide every resident man, woman and child with hundreds of packs per day.
The result of all this is that governments lose badly needed revenue. For example, in New York State, where an estimated 26 million packs of cigarettes are sold each month, the state Department of Health estimates that Albany loses $55 million-$99 million per month in uncollected cigarette taxes. That’s $660 million-$1.2 billion per year.
Nationwide, the annual loss is estimated at $5 billion at the state level, and a further $3.8 billion loss at the federal level.
Disturbingly, the financial loss and budget effect are only part of the problem. Often the state’s loss is terrorist organizations’ gain. In 2008, under my leadership, a House Homeland Security Committee investigation found a terrifying nexus between cigarette smuggling and terrorism.
We uncovered far too many examples. Consider, counterfeit cigarette tax stamps were found in an apartment used by members of the Egyptian Islamic Jihad cell that carried out the 1993 bombing of the World Trade Center. The notorious “Lackawanna Six” Islamic-terrorist cell received $14,000 from a former gas station operator, who was subsequently convicted for cigarette trafficking and money laundering.
In 2002, authorities convicted conspirators in a cigarette smuggling ring that generated a profit of $1.5 million — part of which was funneled to Hezbollah, along with laptops, night-vision goggles, stun guns and blasting equipment. In May 2010, New York State tax agents disrupted a smuggling operation, in which an FBI wiretap recorded one man recruiting for Al Qaeda, discussing blowing up a shopping center.
Last year, the U.S. comptroller general and the Justice Department verified that cigarette smuggling provides financial support for international terrorist groups including Hezbollah and Al Qaeda.
For years, cigarette smuggling has presented a security threat that has not been addressed. With the revenue-starved governments across the country – including in New York — facing huge shortfalls, there is even more incentive to address the problem. The era for tolerating cigarette smuggling with ineffective tax enforcement must end. That’s why I cosponsored the Smuggled Tobacco Prevention Act.
With budget short falls and ill-gotten gains going to criminals – including U.S. enemies — the federal and state governments, along with manufacturers, must prioritize the fight against smuggling and stop the diversion of needed revenue to terrorists and criminals. A coordinated response can counter a significant threat — while covering the cost of better law enforcement and important homeland security programs.