Summary

Cigarette smuggling from low- to high-tax states in the United States, known as interstate smuggling, may be a reemerging problem. Such activity, prominent in the 1970s, is likely when differences in cigarette taxes across the states are significant enough to make it profitable. Many states have sharply increased their cigarette taxes; at the same time, most low-tax states have not. Recent estimates suggest that smuggling has cost states hundreds of millions of dollars in annual tax revenues. International smuggling between Canada and the United States has been a problem in recent years. According to the Canadian government, sharp rises in Canadian cigarette taxes in the late 1980s and early 1990s led to large-scale smuggling between the two countries that was conducted almost entirely by organized crime. Violence increased, merchants suffered, and in one year alone, Canada lost more than $2 billion (in Canadian dollars) in tax revenues. Canada responded in 1994 by sharply reducing its cigarette taxes and boosting its enforcement efforts. Since then, smuggling has declined significantly.

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, yet most low tax states have not; (4) as a result, studies suggest that the level of interstate smuggling activity may now be increasing; (5) recent estimates suggest that smuggling is responsible for states collectively losing hundreds of millions of dollars in annual tax revenue; (6) recent experiences demonstrate that international smuggling can occur when cigarette tax rates are substantial; (7) international smuggling has occurred recently between Canada and the United States; (8) 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; (9) violence increased, merchants suffered, and in one year alone, Canada and its provinces lost over $2 billion (in Canadian dollars) in tax revenues; (10) Canada responded in 1994 by sharply reducing federal and provincial cigarette taxes and increasing its enforcement efforts, among other steps; and (11) since then, smuggling has declined considerably.