July 1, 2005 marks the first anniversary of Michigan’s 75-cent cigarette tax hike. A national leader in such tax hikes, the Great Lakes State is also making a name for itself as a home to brazen smugglers of illicit cigarettes and to other scofflaws of the tobacco tax.
Michigan tobacco users have suffered several large tax increases. In 1994, Michigan raised its 25-cent cigarette tax to 75 cents — a 200 percent hike. Taxes were increased by 50 cents more in 2002. With last year’s hike, the cigarette tax now stands at $2.00 per pack — fourth highest in the country.
This unusually heavy excise tax generates a passel of problems for Michigan. Because other states choose to tax tobacco products more reasonably, there is a price differential between most other states and our own. Turning this differential into profit has become the goal of criminal enterprises that smuggle cigarettes into Michigan and other high-tax states, selling the smokes tax-free.
It is difficult to determine how much cigarette smuggling has increased in Michigan. One major difficulty in tracking smuggling activity is that smugglers based in Michigan are sometimes apprehended in other states. These arrests do not necessarily show up in Michigan statistics.
For example, this April, a Jordanian-born resident of Dearborn was seized by Ohio authorities in connection with illicit tobacco trafficking. More than $1 million in tobacco products were confiscated as part of the arrest. It was believed that he planned to sell his tobacco products in Michigan.
In May, four residents of Windsor were charged in Ontario courts with smuggling and possession of "unstamped" tobacco products (cigarettes are often marked with a stamp from the area where they were sold to prove that taxes have been paid on them). According to a Canadian Newswire report, officials believe "approximately 642 cases of tobacco were smuggled into Canada" from Michigan, suggesting that Michigan may now be a distribution hub for cross-border smuggling.
These are by no means the first tobacco-related smuggling arrests involving Michigan. In 2002, the Mackinac Center wrote about two cigarette smugglers arrested in an FBI sting. The duo were driving vans of illicit cigarettes from North Carolina to Detroit and allegedly using a portion of their profits to subsidize the work of Hezbollah, a terrorist organization in Lebanon with possible links to al-Qaida.
An associate of one of those smugglers, a Dearborn resident, was arrested in a different operation. He subsequently pled guilty to smuggling as much as $72,000 worth of illicit tobacco each month to Michigan. According to the U.S. Department of Justice, he gave a portion of his profits to an "orphans of martyrs program" run by Hezbollah to help the relations of those killed in the group’s terrorist operations or by its enemies.
In other words, Michigan’s cigarette taxes are not just spurring illegal smuggling; they appear to be indirectly subsidizing the type of terrorism America has fought two recent wars to put down.
Nor is smuggling the only issue; there is also the problem of robbery. Last October, The Detroit News reported that a truck holding 135 cases of cigarettes worth more than $27,000 was hijacked in Washtenaw County. The truck driver was reportedly pistol-whipped and blindfolded during the assault. According to the Washtenaw County Sheriff’s Department, this is the second cigarette-related hijacking in that county since 1998.
Theft is not limited to the cigarettes themselves. In 1997, the state Legislature responded to concerns over illicit cigarette sales by passing a law requiring that stamps be placed on all cigarette packages bought and sold in the state of Michigan. In September 2000, the state obtained a felony charge against a suspect from Ypsilanti who was found in possession of 650 Michigan tax stamps believed to have been thieved from a wholesaler.
Michigan’s citizens and legitimate businesses can only hope that no one is killed or injured in the crossfire of illegal tobacco trafficking that state government has helped tax into being. Given the costs of such crime, the state should consider addressing Michigan’s cigarette smuggling problem by cutting the excise tax that has made cigarette trafficking so popular. Lawmakers might lose some revenue, and some more (legal) cigarettes might be smoked, but the state — and the rest of the world — could end up a safer, more prosperous place.
Michael D. LaFaive is director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.