Smuggled smokes: More potential profit for organized crime

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

Each year we estimate the degree to which cigarettes are smuggled between states and from Mexico or to Canada. Our new smuggling estimates indicate that in 2020, nearly 54 percent of New York’s cigarette consumption is a function of tax evasion and avoidance, or smuggling. That is followed by California (45 percent) New Mexico (44 percent), Washington (42 percent) and Minnesota (35 percent), which just moved into the top five smuggling states.

Regulators should learn from Massachusetts’ experience with smuggling. The Bay State law that basically banned menthol cigarette sales took effect in 2020. That means that our model contains six months of post-ban data. It tells us that smuggling in that state has leapt to 27 percent of the marketplace from 20 percent just the year before. This increase comports with what has been seen on the ground. Early indications are that lost sales there were just picked up in surrounding states. New Hampshire’s cigarette tax revenue alone leapt 18 percent from fiscal year 2020 to 2021.

If the Food and Drug Administration bans menthol cigarettes nationwide it likely would send international illicit trade into the United States skyrocketing, enrich both domestic and international traffickers, and bring about a host of other, unintended consequences. Banning 30 percent of the cigarette market is the equivalent of ringing an illicit-profits dinner bell for international scofflaws and yelling, “Come and get it!”

The federal government surely knows this. In 2015, the State Department published “The Global Illicit Trade in Tobacco: A Threat to National Security” and outlined the negative consequences of illicit cigarette trafficking. “Not only are criminal networks expanding through the trafficking in illicit tobacco products, but they are diversifying their activities,” the report said.

Cigarette trafficking isn’t the only issue surrounding illegal networks. Once the supply chain is established, many extralegal products are likely to ride in on it. One crime cell charged with crimes in 2006 was accused of moving not just smokes but also baby formula and counterfeit Viagra. To paraphrase satirist Dave Barry, we’re not making this up.

It isn’t a stretch to suggest that international and domestic scofflaws will salivate at the opportunity to boost their bottom lines by hauling menthol smokes — and other products — into the country. During the COVID-19 pandemic, South Africa banned cigarettes outright and contraband trafficking leapt. They are legal there again now, but the nation can’t seem to get the illicit market genie (now capturing 60 percent) back into the bottle.

The U.S. will not be immune to a large uptick in the illicit market. It already suffers from transnational smuggling of cigarettes as well as drugs. In 2020, just one owner of two bonded warehouses in Texas was busted with 422 million cigarettes acquired overseas and pleaded guilty to intent to move them into Mexico — and this is for a legal product. Our statistical model shows a large amount of smuggling coming from Mexico. We believe our model may misattribute much of the total there, instead of where it belongs: our expansive port and bonded warehouse system.

While the FDA rule-making process has raised the specter of an expanded illicit market, the agency said little about thwarting it at America’s porous points of entry. The U.S. can’t seem to keep migrants from illegally transiting its borders; what makes anyone think it will keep hundreds of millions more cigarettes from crossing?

Indeed, it is easy to find news stories of illicit narcotics, cell phones and cigarettes finding their way into federal and state prisons, sometimes with the help of prison guards. We could make America a police state run by our own federales and it wouldn’t stop the internationally sourced flow of flavored favorites.

The FDA would be wise to check its ambition. History, scholarly evidence and experience tell us that prohibition of popular products only results in the rise or expansion of illegal markets, as well as other costly, unintended consequences.

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

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