States Brace for Cigarette Backlash

NEW YORK – As state after deficit-ridden state ratchets up cigarette taxes, authorities are bracing for some unwelcome consequences in the form of more aggressive smuggling and bolder use of the Internet as a tax-evading tobacco shop.

Never before have so many states — 17 this year alone — approved cigarette-tax hikes in such a short time. Anti-smoking advocates call it a win-win situation, enabling states to reduce smoking and budget deficits simultaneously.

In many legislatures, even tax-averse conservatives have supported the increases — expected to generate $2.2 billion annually in new revenue — as budget woes and anti-smoking militancy transform cigarette buyers into America's easiest-to-tax constituency.

With prices as high as $7 a pack in New York City, and more than $4 in many states, some smokers are trying harder than ever to quit. Those unwilling or unable to kick the habit are left with several options — legal, quasi-legal and illegal — for getting a nicotine hit without a tax hit.

Those who choose the illegal route are often successful. The Bureau of Alcohol, Tobacco and Firearms estimates state and federal authorities lose more than $1.5 billion annually in evaded cigarette taxes.

The ATF concentrates on major interstate smuggling — operations involving at least 60,000 cigarettes. The workload has increased steadily in recent years; ATF now has about 150 active cigarette-smuggling cases.

``There's no question some large-scale organized crime gangs are involved,'' said ATF spokesman John D'Angelo. ``Not only are these criminals depriving state and federal governments of tax revenue, they're using their profits for other criminal activity.''

The primary sources of smuggled cigarettes are tobacco-growing states with low taxes — for example, Virginia with a lowest-in-the-nation tax of 2 1/2 cents per pack, and Kentucky with a 3-cent per pack tax.

In Ohio, where the tax recently rose 31 cents per pack, officials plan to monitor the Kentucky border for smugglers, and police are being trained to check for Ohio tax stamps on packs sold at stores. A carton of name-brand cigarettes in Ohio costs about $40, compared to about $25 in Kentucky.

In Maryland, where the per-pack tax rose to $1 in June, authorities are on alert for more smuggling from Virginia. There were only five arrests in Maryland for cigarette smuggling in 1997, and more than 50 so far this year.

The Internet — which thus far accounts for only a small fraction of cigarette sales — may pose a bigger long-term threat to tax collectors than smuggling. The hefty tax hikes may prompt more smokers to order in bulk from online merchants, who in turn may resist state efforts to collect taxes.

Under federal law, online cigarette vendors are required to report the names and addresses of out-of-state customers, but the law is widely flouted.

``Most vendors aren't turning over their customer list, so the Internet is becoming a hotbed of tax evasion,'' said Kurt Ribisl, a professor at the University of North Carolina School of Public Health.

Ribisl oversaw a study this year that identified 195 Internet cigarette vendors, up from 88 a year earlier. He said most advertise low-tax cigarettes and indicate they won't report to any authorities.

``We're definitely unprepared right now — we don't have the tools to get the states their proper revenue,'' he said. ``You need federal legislation, because a patchwork approach from individual states is going to bog down.''

In Congress, Rep. Martin Meehan, D-Mass., is leading an effort to tighten regulation of Internet cigarette sales. Meehan's chief of staff, Bill McCann, predicted bipartisan legislation would be drafted this year aimed at enforcing existing requirements that Internet merchants block sales to minors and report out-of-state buyers.

Some states already are sending tax bills to smokers who patronized the Internet.

``They've thumbed their noses at us,'' said Gene Gavin, Connecticut's tax commissioner. ``And they're right, because we don't do anything.''

One legal complication is that many of the Internet sites are run by American Indians. Sales of cigarettes on Indian reservations are exempt from state and local taxes, and some Indian merchants contend their Internet sales also should be tax-exempt.

Larry Ballagh, a Seneca Indian from upstate New York, sells tax-free cigarettes over the Internet.

``Adults who have been smoking for a number of years, they're not going to quit smoking,'' he said. ``But they will shop around.''

Tom Ryan, a spokesman for Philip Morris USA, said the tobacco company supports a crackdown on tax evasion.

``The people really hurt by all this are the retailers who are doing business legitimately.'' he said. ``Jobs are on the line.''

John Singleton, a spokesman for R.J. Reynolds Tobacco Co., questioned whether law enforcement agencies — stretched thin by anti-terrorism duties and tight budgets — have the resources to combat cigarette smuggling.

``It's extremely profitable for those willing to break the law to drive to a low-tax state, load up a van, drive to a state with high taxes and sell them out of the back of a truck,'' he said.

Cigarette taxes can be a reliable revenue source for states if the taxes are ``reasonable,'' Singleton said.

``But with taxes at what a lot of smokers view as an unreasonable level, the states aren't going to get the revenues they're projecting and will find themselves with increasingly hard-to-enforce legal problems,'' he said.

Eric Lindblom of the Campaign for Tobacco-Free Kids disagreed, saying every state which has raised cigarette taxes has boosted revenues despite reduced smoking and cigarette sales. He said tobacco companies highlight tax-evasion problems in hopes of swaying politicians.

``For someone who gets contributions from the industry, these arguments are used as false crutches to support their opposition to tax increases,'' he said.