Contraband smoke: more potential profit for organized crime

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The Food and Drug Administration’s Center for Tobacco Products is hosting a “virtual listening session” for those who want to weigh in on a proposed rule that would effectively ban the sale of menthol-flavored cigarettes nationwide. The proposed standard for tobacco products would increase the illicit trade in cigarettes. The United States already has a cigarette smuggling problem. Banning 30% of the current cigarette market would only fan the flames of illegal markets.

Each year, we estimate the degree of interstate cigarette smuggling from Mexico or Canada. Our new smuggling estimates indicate that in 2020, nearly 54% of cigarette consumption in New York City is a function of tax evasion and evasion, or smuggling. Next come California (45%), New Mexico (44%), Washington (42%) and Minnesota (35%), which have just entered the top five smuggling states.

Regulators should learn from Massachusetts’ experience with contraband. The Bay State law that essentially banned sales of menthol cigarettes went into effect in 2020. This means our model contains six months of post-ban data. He tells us that smuggling in that state jumped to 27% of the market, from 20% the previous year. This increase is consistent with what was observed in the field. Early indications are that lost sales there have just been recovered in surrounding states. New Hampshire’s cigarette tax revenue alone jumped 18% between fiscal year 2020 and 2021.

If the Food and Drug Administration banned menthol cigarettes nationwide, it would likely skyrocket international illicit trade in the United States, enrich domestic and international traffickers, and lead to a host of other unintended consequences. Banning 30% of the cigarette market is like ringing the for-profit dinner bell for international fraudsters and shouting, “Come get it!”

The federal government surely knows that. In 2015, the Department of State published “The Global Illicit Trade in Tobacco: A Threat to National Security” and described the negative consequences of illicit cigarette trafficking. “Criminal networks not only grow through the trafficking of illicit tobacco products, but they diversify their activities,” the report states.

Cigarette trafficking is not the only problem surrounding illegal networks. Once the supply chain is established, many extralegal products are likely to follow it. A criminal cell charged with crimes in 2006 was accused of moving not only cigarettes, but also formula milk and counterfeit Viagra. To paraphrase satirist Dave Barry, we’re not making this up.

It’s no exaggeration to suggest that international and domestic fraudsters will salivate at the chance to increase their bottom line by transporting menthol fumes – and other products – into the country. During the COVID-19 pandemic, South Africa outright banned cigarettes and contraband trafficking surged. They’re legal there again now, but the nation can’t seem to get the illicit market genie (now capturing 60%) back in the bottle.

The United States will not be immune to a sharp rise in the illicit market. It already suffers from transnational smuggling of cigarettes as well as drugs. In 2020, a single owner of two bonded warehouses in Texas was arrested with 422 million cigarettes acquired overseas and pleaded guilty to intending to move them to Mexico – and that’s for a legal product . Our statistical model shows a large amount of contraband from Mexico. We believe our model may misattribute a large portion of the total there, instead of where it belongs: our vast system of ports and bonded warehouses.

While the FDA’s rulemaking process has raised the specter of an expanded illicit market, the agency has said little about thwarting it at America’s porous ports of entry. The United States does not seem to be able to prevent migrants from transiting illegally through its borders; what makes it look like it will stop hundreds of millions more cigarettes from getting through?

Indeed, it is easy to find news stories about illicit narcotics, cell phones and cigarettes ending up in federal and state prisons, sometimes with the help of prison guards. We could turn America into a police state run by our own federal authorities and that wouldn’t stop the international flow of flavored favorites.

The FDA would be well advised to verify its ambition. History, scientific evidence and experience tell us that banning popular products only leads to the rise or expansion of illegal markets, along with other costly and unintended consequences.

Michael D. LaFaive is the senior director of the Morey Fiscal Policy Initiative for the Mackinac Center for Public Policy in Midland, Michigan. Follow him on Twitter @lafaive.

Todd NesbitPh.D., is an assistant professor of free enterprise and entrepreneurial economics at Ball State University in Muncie, Ind.

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