A new report from the National Academy of Sciences explains how the U.S. is falling behind other nations, including Spain, the United Kingdom, Canada and the European Union, in combating illicit tobacco sales and tobacco tax abuse.
The new report estimates that the share of illicit tobacco sales as part of the total U.S. tobacco market is between 8.5 and 21 percent, equal to between $2.95 billion and $6.92 billion in lost state and local tax revenue.
The report details continued abuse of federal excise tax laws through mislabeling of tobacco products, which the U.S. Government Accountability Office estimates has resulted in between $2.6 and 3.7 billion in lost federal revenues since 2009.
“The U.S. is falling behind on tobacco tax laws and enforcement while costing federal, state and local governments billions in vital revenue,” said Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, in a statement. “Ineffective enforcement of tobacco laws ultimately derails the positive effects tobacco taxes have on keeping cigarettes out of children’s hands and ending the smoking epidemic.”
Last year Wyden chaired a Finance Committee hearing where he called on the Treasury Department to close tobacco tax loopholes that cost the federal government billions of dollars in taxes and undermine public health initiatives.
The report found that federal tobacco enforcement is governed by a “complicated web of laws” with enforcement jurisdiction spread across four different agencies, including the Alcohol and Tobacco Tax and Trade Bureau in the Treasury Department, the Bureau of Alcohol, Tobacco, Firearms and Explosives in the Justice Department, Immigration and Customs Enforcement and Customs and Border Protection in the Department of Homeland Security.
In addition, the report highlighted the challenges of coordinating the various agencies and jurisdictions, and found an overall lack of emphasis on tobacco enforcement among stakeholders. In one instance, the researchers found the number of tobacco investigations initiated by ATF declined from 100 in 2011 to just 11 in 2013. Meanwhile, illicit tobacco sales have nearly tripled over the past two decades.
The report also highlighted the uncertain public health consequences of e-cigarettes, and the inconsistent regulation and taxation of electronic nicotine delivery devices both in the U.S. and internationally. Under federal law, e-cigarettes are not currently subject to federal tobacco taxes, nor are they subject to limitations on sales to minors, marketing, ingredients or flavoring.
Finally, the report identified a number of ways to improve tobacco tax enforcement and modernize U.S. tobacco enforcement, including better communication and information sharing among agencies and jurisdictions, dedication of tobacco-specific enforcement efforts, harmonization of tax rates, and implementing tracking and tracing Tax Evasionprograms. The report found that these initiatives have been shown to significantly reduce illicit tobacco sales and tobacco tax abuse in other countries.
Tobacco use has declined in the past few decades due to measures such as high taxes on tobacco products and bans on advertising, though there are still more than 1 billion people worldwide who regularly use tobacco, including many who purchase their products illicitly, the report noted. Illicit tobacco markets can undermine public health efforts to reduce tobacco use, while depriving governments of revenue. In the United States, the tax revenue losses are borne mostly by the states.
As the U.S. Food and Drug Administration considers possible regulations for tobacco products, the agency asked the National Research Council and the Institute of Medicine to examine the U.S. and international markets for illicit cigarettes and the evidence on how illicit markets react to various policies and regulations.
Currently, the U.S. illicit tobacco market primarily consists of bootlegging from Native American reservations and low-tax states, such as Virginia, to high-tax states, such as New York. Bootlegging is the legal purchase of cigarettes in one jurisdiction and their consumption or resale in another, without the payment of applicable taxes or duties in the jurisdictions where they are resold.
Large-scale international smuggling, counterfeit cigarettes, and “illicit whites”—cigarettes legally produced under unique brand names or no brand name—which are prevalent in many other countries, are largely absent from the U.S. market, the report pointed out.
The portion of the total U.S. tobacco market represented by illicit sales is between 8.5 percent and 21 percent, or 1.24 billion to 2.91 billion packs of cigarettes annually, concluded the committee that conducted the study. This share has nearly tripled over the past two decades.
The illicit tobacco market is not evenly distributed across states: it may constitute as much as 45 percent of all tobacco sales in high-tax states, such as New York, while it is low in many other states.
The committee classified 22 states and the District of Columbia as net exporters, and 28 states as net importers. In 2011 the net importing states lost an estimated $2.95 billion in state and local cigarette excise taxes, with New York accounting for nearly half of this total. The net exporting states gained an estimated $0.82 billion.
Comprehensive interventions adopted by several countries show that it is possible to reduce the size of the illicit tobacco market through tobacco-specific enforcement resources and collaboration across jurisdictions. For example, Spain reduced the illicit share of its market from 15 percent in 1995 to 2 percent in 2001 through licensing and control measures, enforcement efforts, and legal agreements.
The United Kingdom used stamping and marking requirements on cigarettes, agreements with tobacco manufacturers, enhanced enforcement efforts, and public education campaigns to reduce the size of its illicit market from 21 percent in 2000 to 9 percent in 2013.
“In the future, non-price regulation of cigarettes–such as product design, formulation, and packaging–could, in principle, contribute to the development of new types of illicit tobacco markets if incentives for such illicit trade are not controlled or mitigated,” said Peter Reuter, a professor in the school of public policy and department of criminology at University of Maryland who chaired the committee conducting the study. “However, based on the limited available evidence we reviewed, if new regulations were introduced, any increase in the demand for illicit tobacco may only be modest.”