Insiders see higher tobacco taxes fueling black market


By Andy Metzger

State House News Service

BOSTON — The $1-per-pack jump in cigarette taxes and the more than doubling of chewing-tobacco taxes will provide an incentive for organized crime to draw more profits from Massachusetts users while stiffing the state, tobacco-industry executives told a state panel last week.

“I’ve heard some criminals celebrating tax increases,” Reynolds American Inc. American Director of Corporate Security Steve Grimaldi told members of the Illegal Tobacco Commission, an advisory panel set up as part of July’s tax law.

New tobacco taxes are expected to raise $157.5 million annually, delivering a jolt of revenue for state spending priorities while policymakers are steering new state dollars into public transportation.

Some lawmakers cheered the potential for higher costs to discourage smoking, while state Rep. Brad Hill, an Ipswich Republican, said tobacco-tax increases are a “stimulus package” for New Hampshire, and five “mom-and-pop” shops in his district closed after the last cigarette-tax increase.

“Every time you increase this type of a tax, you’re going to see an increase in sales in New Hampshire,” Hill said in a floor debate on the tax bill in April. “In New Hampshire, within a month of passing the last tax increase, if you went to the smoke shops — I counted the plates — over 80 percent of the plates are Massachusetts consumers. That’s what’s going to happen if you pass this tax tonight.”

The potential boon for organized crime was not a major point of argument in the tax debate, which also included a computer-services tax that the Legislature repealed soon after its passage.

“I think that’s why the Legislature recommended the commission, because it is complex with a lot of ramifications,” Department of Revenue Commissioner Amy Pitter told the News Service, saying the commission will be able to delve into aspects financial and criminal before releasing its report.

Citing data from the Mackinack Center for Public Policy and the nonprofit Tax Foundation, the Reynolds security official said smuggled cigarettes made up about 60 percent of cigarettes sold in New York in 2011. He said the tobacco company is determined to fight the illicit trade, which undermines its business connections and supply network.

Grimaldi said organized crime brings tobacco from southern states up the “New Tobacco Road” of Interstate 95, and he said a truckload of cigarettes from Virginia would have the potential to yield $385,000 in Massachusetts by skirting the state’s taxes.

The excise tax on cigarettes in New Hampshire is $1.68 per pack, more than the 30-cents-per-pack rate in Virginia, but well below the Massachusetts charge of $3.51 per pack.

“A lot of people don’t understand what is going on or the gravity of it. And it is huge, big, big business,” said Grimaldi, who said states should devote law enforcement to the specific crime, and said the Bureau of Alcohol Tobacco Firearms and Explosives has not made tobacco smuggling enough of a priority while Virginia has taken steps to reduce the trade. He said, “Illicit cigarettes are now the currency of illegal organizations,” and said cigarette smuggling is more lucrative and less risky than drug smuggling.

Northeast Association of Wholesale Distributors Executive Director Paul Caron described to his fellow commissioners how retailers will buy smuggled tobacco, keeping that under the counter for sale to regular customers while keeping some legitimate tobacco on hand for strangers. He told the News Service Massachusetts is “hemorrhaging tens of millions of dollars” through underground tobacco sales.

DOR chief economist Kazim Ozyurt said it is “hard to quantify” how much reduced sales are caused by people changing smoking habits versus buying illicit cigarettes, and said the tobacco revenue is “pretty much on target with what we thought.”

The state expects to bring in $688 million in total tobacco taxes this year. DOR factored in a $57 million to $64 million “downward adjustment” caused by the price increases, and the state will take in slightly less in the first fiscal year of the new taxes because the tax went into effect after the beginning of the year.

Reynolds executive Steven Gentry counted “social acceptance of tax evasion” among the public-policy reasons to clamp down on the illegal cigarette trade.