Dangerous Draw 

Why critics say Virginia's low cigarette tax entices criminals

The driver and two associates will go on trial in Maryland later this month on charges of selling untaxed cigarettes, a felony punishable by two years in jail and a $50-per-carton fine.

The case offers a window into Virginia's role in supplying a booming and increasingly lucrative market for smuggled cigarettes.

Virginia, home to one of the world's largest cigarette manufacturers and a sprawling tobacco industry, has the nation's lowest cigarette tax. A pack of cigarettes that costs $4 in Virginia can bring $7 in high-tobacco-tax places such as New York City.

Driven by the twin motives of budgetary shortfalls and tobacco's harmful health effects, 19 states have raised taxes on cigarettes this year, opening a widening gap between high- and low-tax states. The wider the gap, the bigger the payoff for smugglers.

Virginia has resisted raising its tax, feeling the pressure of well-heeled lobbyists representing cigarette makers and tobacco growers. Even Gov. Mark R. Warner, who is desperately seeking new revenue sources to offset a $1.5 billion budget shortfall, has not gone after cigarettes.

"I just don't detect any sentiment in the Senate for raising the cigarette tax right now," says state Sen. Kenneth Stolle, R-Virginia Beach, a member of the Senate Finance Committee. Virginia's 2.5-cents-per-pack tax has gone untouched for 42 years.

The U.S. Customs Service says profits from cigarette smuggling now rival those from trafficking in illegal drugs. And no state is a more tempting target for the traffickers than Virginia.

Once known as a major breeding ground for gunrunners because of its lax gun laws, the state is now recognized throughout the Northeast as a leading supplier of smuggled cigarettes.

To make a tidy profit, smugglers who load up on cheap cigarettes in Virginia need travel no farther than Maryland, which recently raised its tax to $1 per pack.

For the suspected smuggling ring in Hyattsville, however, Maryland was only a way station en route to the Promised Land of bootleg cigarettes: New York City.

The Big Apple recently piled a $1.50 local tax onto a $1.50 state tax for a total of $3, raising the retail price of cigarettes to around $7 per pack.

The Maryland men allegedly bought the cigarettes in New Church, drove them to Hyattsville and repackaged them, then shipped them on to New York, where they were resold. The operation was profitable at every step of the process, says Dale Irwin, assistant director of field enforcement in the Maryland comptroller's office, which investigated the case.

"The retailer was making money in Virginia," Irwin says. "The guy taking them into Maryland was making money. The guy who was taking them to New York was making money. And the person who eventually sold them over the counter was making money."

In fiscal 2002, which ended June 30, Maryland authorities made 74 arrests for cigarette smuggling, seizing 156,216 packs of untaxed cigarettes valued at nearly $600,000.

Irwin estimates that 90 percent of the seized cigarettes came from Virginia.

New York City authorities estimate that 80 percent of cigarettes smuggled into the city originate in Virginia.

"This is organized crime," Irwin says. "We've had some information come back to us from reliable sources that there have been warehouses where people had semi-automatic machine guns guarding their product."

When the smuggled cigarettes are resold in high-tax states, the sales are off the books. The retailer sells them at or near the fully taxed price, but pays no tax to the state and pockets the difference.

New York City Mayor Michael R. Bloomberg has estimated that cigarette-tax evasion costs the city $40 million in lost tax revenue every year. Nationwide, annual losses to state and federal governments from uncollected cigarette taxes may be as high as $2 billion, according to the U.S. Bureau of Alcohol, Tobacco and Firearms.

In April, New York City authorities announced 20 arrests resulting from two undercover investigations of wholesale cigarette smuggling from Virginia. Agents had followed northbound trucks and vans loaded with thousands of cartons of cigarettes into the city, where they were sold to delicatessens, smoke shops and other retailers at costs far below wholesale.

Most smuggled cigarettes are initially purchased from retailers. The men charged in the Hyattsville case were buying 299 cartons of cigarettes worth $6,500 every day from the small, roadside convenience store on Virginia's Eastern Shore, according to Maryland authorities. By keeping each sale under 300 cartons, the retailer evades a federal law requiring documentation of large sales.

"The tax is so low, it's quite tempting," says Sam Miller, a spokesman for the New York City Department of Finance. "It's clearly an enticement to smuggle."

Virginia's neighbors Kentucky and North Carolina, two more big tobacco-producing states, have the next-lowest cigarette-tax rates and are also sources of supply for smugglers. Rates are 3 cents per pack in Kentucky and 5 cents in North Carolina.

A coalition of health-care groups, spearheaded by the American Lung Association of Virginia, has proposed that Virginia raise its cigarette tax by 50 cents to 52.5 cents per pack. Even that steep a hike would leave Virginia's levy below the national average of 58.8 cents per pack, the advocates say. The groups estimate the tax hike would generate $318 million a year in new state revenue, discourage tens of thousands of Virginians from smoking and reap nearly $1 billion in long-term health-care savings.

Warner, who has been forced to make sweeping cuts in state spending, suggested in July that it might be time to consider raising the cigarette tax, but he has not actively pushed for it.

That may be a bow to political realities. Tobacco farming generated $124 million in Virginia last year, and Philip Morris' cigarette factory in Richmond is one of the state's major employers, with 6,300 employees.

Any attempt to increase the cigarette tax would be sure to attract opposition from the tobacco lobby.

"We don't believe that balancing the state budget by raising cigarette excise taxes is sound economic policy," says Tom Ryan, a spokesman at Philip Morris U.S.A.'s New York headquarters. "We don't believe that it would do much to solve the fiscal problems now faced by the state." Ryan says stopping the sale of contraband cigarettes is a "primary business goal" of Philip Morris, but he adds: "It's not just a matter of having a handful of states with low excise taxes that's leading to the problem of increased contraband in cigarettes."

Another part of the problem, Ryan says, is the burgeoning availability of cheap cigarettes on the Internet.

Key members of the General Assembly's money committees say there is little appetite in Richmond for raising the Virginia tax.

"I am unaware of any other type of tax that's been increased to try and reduce criminal activity," says Virginia Beach's Stolle. "To me that is not a justifiable reason to do that."

Local cigarette taxes are levied in 37 Virginia cities, towns and counties, although there are no taxes levied in Richmond or its surrounding counties.

Del. Harry R. "Bob" Purkey, R-Virginia Beach, a member of the House Finance Committee, said the varying local tax rates are a cause for concern.

"Taxing tobacco is convenient. It's an easy thing to tax," Purkey says. "But if we're going to do it, we need to realize that the municipal governments are already ahead of the state — way ahead. They're aggressively pursuing this tax. And we need to look at the total tax that's being imposed before we go down the road of adding any further state tax."

"There has to be some sort of uniformity," he says. "We could have smuggling within the state if we're not careful." S


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