Summary

Smuggling cigarettes from low- to high-tax states, which was prominent in the 1970s, may be a reemerging problem because a number of states have sharply increased cigarette taxes while low-tax states have not. Recent estimates suggest that smuggling has cost states hundreds of millions of dollars in tax revenues each year. In addition, international smuggling has occurred recently between the United States and Canada. According to the Canadian government, sharp increases in Canadian cigarette taxes in the late 1980s and early 1990s led to large-scale smuggling between the United States and Canada, almost all of it conducted by organized crime. Violence increased, merchants suffered, and--in one year alone--Canada and its provinces lost more than $2 billion (in Canadian dollars) in tax revenues. Canada sharply reduced federal and provincial cigarette taxes in 1994 and increased its enforcement efforts. Since then, smuggling has declined considerably.

GAO noted that: (1) smuggling cigarettes from low- to high-tax states, or interstate smuggling, prominent in the 1970s, may now be a reemerging problem; (2) such activity is likely to occur when the differences in cigarette taxes across the states are significant enough to make it profitable; (3) recently, many states have opted to sharply increase their cigarette taxes; (4) yet most low-tax states have not; (5) as a result, recent studies suggest that the level of interstate smuggling activity may now be increasing; (6) in fact, recent estimates suggest that smuggling is responsible for states collectively losing hundreds of millions of dollars in annual tax revenues; (7) in addition, recent experiences demonstrate that international smuggling can occur when cigarette tax differentials are substantial; (8) international smuggling has occurred recently between Canada and the United States; (9) according to the Canadian government, sharp increases in Canadian federal and provincial cigarette taxes in the late 1980s and early 1990s led to large-scale smuggling between the United States and Canada conducted almost entirely by organized crime; (10) violence increased, merchants suffered, and in one year alone, Canada and its provinces lost over $2 billion (in Canadian dollars) in tax revenues; (11) Canada responded in 1994 by sharply reducing federal and provincial cigarette taxes and increasing its enforcement efforts, among other steps; and (12) since then, smuggling has declined considerably.