Commercial Smuggling

Commercial smuggling, which involves large-scale, long-distance transport, also plays a major role in cigarette trafficking. Because it requires significant organizational abilities, the distribution networks of organized crime syndicates have long been involved in the smuggling of cigarettes.[*]

We estimate that the destination states with the top five rates of inbound, commercially smuggled cigarettes are New Jersey, at 29.1 percent of the state’s total consumption; New York, at 28.5 percent; Vermont, at 24.2 percent; Massachusetts, at 23.3 percent; and Connecticut, at 20.9 percent. Our calculations also suggest that two of these five states have experienced significant increases in their rates of commercial smuggling. We estimate that between 2006 and 2009, New York’s commercial smuggling rate leapt nearly 9 percentage points, from 19.7 to 28.5 percent, while Vermont’s leapt 10 percentage points, from 14.2 percent to 24.2.

Graphic 6: Top Five Commercial Smuggling Import and Export States by Percentage of Total State Cigarette Consumption (Legal and Illegal), 2009

Graphic 6: Top Five Commercial Smuggling Import and Export States by Percentage of Total State Cigarette Consumption (Legal and Illegal), 2009 - click to enlarge

Notes: Estimates computed based on regression results presented in columns 3 and 4 of Graphic 12 (see the Appendix). The smuggling percentage is negative when the state is a net importer of smuggled cigarettes, and the percentage is positive when the state is a net exporter of smuggled cigarettes. The sum of commercial, casual and Canada/Mexico smuggling does not equal the totals presented in the final column due to the nonlinear nature of the model. North Carolina, Hawaii and Alaska are not included.

These increases in the model’s commercial smuggling estimates reflect large cigarette excise tax increases in both states. In Vermont, taxes were hiked in July 2008 and July 2009 by 20 cents and 25 cents per pack, respectively, and the tax now totals $2.24 per pack.[19] In New York, taxes were raised in 2008 by $1.25 per pack, resulting in a tax of $2.75 per pack.[†], [20]

New York’s sky-high tax rates also help explain why Pennsylvania is a net export state with regard to casual smuggling. Pennsylvania’s cigarette tax rate is $1.60 per pack,[21] and we estimate that in 2009, 9.1 percent of Pennsylvania’s entire in-state cigarette consumption was casually smuggled out of the state. Anecdotal evidence suggests that the rate would leap upwards should we update our model with 2010 data.[‡]

[*] For more on this subject, see Edward L. Hudgins, “Memo to the Mafia: Smuggle Cigarettes,” Regulation, no. Spring 1998 (1998): 49. A 2009 paper from The Royal Canadian Mounted Police reports that some 100 organized gangs smuggle cigarettes for profit in Canada alone. See “Contraband Tobacco Enforcement Strategy: Progress Report,”  (Royal Candian Mounted Police, 2009), 8, (accessed Oct. 20, 2010).

[†] In 2010, New York hiked its cigarette taxes by $1.60 per pack, leaving the tax at $4.35 per pack. See “Enacted State Cigarette Excise Tax Rates Effective July 2010,”  (National Conference of State Legislatures, 2010), (accessed Oct. 21, 2010). This new rate was not included in our model, which estimates smuggling rates through fiscal 2009 only.

[‡] Pennsylvania did raise cigarette taxes by 25 cents per pack after the end of fiscal 2009, but New York raised them by 160 cents. The Pocono Record reports that since July 1, 2010, when New York’s cigarette tax hike of $1.60 per pack took place, New York’s legal cigarette sales have plummeted. According to the Record, New York’s July 2010 “tax stamp” sales (one stamp is sold per pack) stood at 28.7 million, down from 43.1 million in July 2009 — a 33 percent decline. New York’s cigarette tax revenues in July 2010 were only $6 million — 5 percent — more than they were in July 2009, despite the 58 percent tax increase. See Stephen Sacco, “New York Tax Gives Pennsylvania Smokin’ Cigarette Sales,” Pocono Record, Aug. 17, 2010, (accessed Oct. 18, 2010). Pennsylvania’s cigarette sales and cigarette tax receipts have increased dramatically: July 2010 cigarette tax revenues were 40.5 percent greater in July 2010 than in July 2009. See “Monthly Revenue Report: July 2010” (Pennsylvania Department of Revenue, 2010), 4, community/monthly_revenue_reports/14801 (accessed Oct. 18, 2010).

[19] “The Tax Burden on Tobacco: Historical Compilation, Volume 44, 2009” (Arlington, Va.: Orzechowski and Walker, 2009), 10.

[20] Ibid.

[21] Ibid.