Cigarette taxes are up - so is smuggling

Md. officials report 46,000 packs seized

August 15, 2008|By Laura Smitherman | Laura Smitherman,Sun reporter

When Maryland doubled the cigarette tax to $2 a pack, some residents may have found a reason to quit. Smugglers, on the other hand, seem to have found a motive to step up their activities.

Since the tax increase took effect in January, agents with the Maryland Comptroller's Office have seized more than 46,000 packs of contraband cigarettes - smokes brought illegally across state lines. That's a nearly four-fold increase from about 13,000 packs seized over the same period in 2007.

And in the largest bust so far this year, agents confiscated nearly 8,000 cigarette packs after stopping a man driving a Chevrolet Astro van on Interstate 495 this month.

State officials say they would be hard-pressed to blame the sharp rise in smuggled smokes solely on higher taxes, but they suspect that the levy is a factor. Maryland has one of the highest tobacco taxes in the nation; neighboring states have some of the lowest.

Virginia's levy, for instance, is 30 cents a pack. That means a carton in the Old Dominion is $17 cheaper than in the Old Line State, creating an opportunity for smugglers to make a quick buck by selling out-of-state cigarettes here.

"It's just become even more profitable for smugglers now," said Jeffrey A. Kelly, director of the comptroller's field enforcement division, adding that his agents on surveillance duty also have spotted more Maryland residents in Virginia buying cigarettes.

The fallout from raising the tobacco tax was the subject of much debate in the Maryland General Assembly.

During a special legislative session last year, Gov. Martin O'Malley proposed raising a number of taxes, including the tobacco tax, as part of a broader package to plug a $1.7 billion budget shortfall. Proponents of boosting the tobacco tax said it would improve public health and discourage smoking, particularly among teens.

But opponents argued that the higher cigarette tax would hurt mom-and-pop businesses near borders with other states and would help to foster a black market and encourage cross-border smuggling.

"The Democrats in their zeal to raise taxes on cigarettes have driven Lord knows how much commerce across the boarder," said Del. Anthony J. O'Donnell, the House minority leader from Southern Maryland.

"The tax increases are going to hurt us in ways we haven't even contemplated yet. We're just starting to see ways we knew they would have an impact."

The higher tax appears to have cut into sales more than expected. Pack sales have dropped 23 percent to 35 percent each month since the tax was enacted - much greater than the 18 percent drop in sales predicted by fiscal analysts when the higher tobacco tax was proposed.

Comptroller Peter Franchot said in a recent letter to legislative leaders that tobacco tax collections this year have been substantially lower than expected. He noted that the strained economy has prompted some consumers to cut back.

At the Citgo gas station in the Western Maryland city of Brunswick, manager Cindy Furr said that her cigarette sales have dropped "dramatically" because customers can cross the Potomac River and buy smokes more cheaply at a convenience store a mile away in Virginia.

Furr said she used to order cigarettes from a wholesaler twice a week, and now she needs to order them only every two weeks, though customers continue to patronize the store for other things.

"We do have some pretty loyal customers, but if someone is going across the bridge to get cigarettes, they may say, 'While I'm here, I'll get gas,' " Furr said. "I just think Maryland is a little too overpriced."

Groups that push for higher taxes, including the Campaign for Tobacco-Free Kids, say that even with the decline of cigarette sales - which they see as a positive outcome - states still see significant increases in tax revenue when they raise the levy.

In Maryland, preliminary figures show tax receipts from cigarettes rose 27 percent to $340 million in fiscal 2008, which ended in June, up from $268 million the year before.

Danny McGoldrick, a researcher with the tobacco-free campaign, said his group encourages states to conservatively estimate the boon to revenue after a tax increase. He also said fewer smokers translates into lower health care costs, another burden on state budgets.

Kelly, whose force includes more than 20 inspectors and agents who oversee the enforcement of alcohol, fuel and tobacco taxes, said they log hours of surveillance and have developed a network of informants, including people who have been arrested and legitimate businesses who hear information about illegal sales.

The comptroller's office is also looking at using high-tech tax stamps to better track cigarette sales and thwart counterfeiters.

Agents tracked Pavel Peleshenko, 50, of Brooklyn, after he bought more than 25 cases of cigarettes, about 30 cartons each, at a large retailer in Virginia, according to authorities.

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