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Proposed federal tobacco tax may cost more than it earns

J. Scott Applewhite/AP Photo Senate Majority Whip Dick Durbin, D-Ill., joined at left by Senate Majority Leader Chuck Schumer, D-N.Y., speaks to reporters as lawmakers work to advance the $1 trillion bipartisan infrastructure bill, at the Capitol in Washington, Tuesday.

HOUGHTON — The U.S. Congress on April 22 introduced a proposal to to establish the first federal e-cigarette tax in history, while at the same time, raising the tobacco tax.

U.S. Senate Majority Whip Dick Durbin (D-Ill.) and Senate Finance Committee Chair Ron Wyden, (D-Ore.), along with U.S. Rep. Raja Krishnamoorthi (D-Ill.) and seven other senate Democrats, backed the Tobacco Tax Equity Act of 2021, which would make amendments to the Internal Revenue Code of 1986, CPS News (cpsdailynews.com) stated in an Apr. 23 report. The main objective of the bill, according to Durbin, is to reduce youth tobacco-use by closing loopholes in the tax code that he claims the tobacco industry exploits to avoid regulation and taxes for their products.

There are others who do not share The Democrats’ views on the impact of the bill, should it pass. On Aug. 5, Michigan Campaign Confidential (https://www.michigancapitolconfidential.com/governments-light-up-cigarette-smuggling) argued that rather than reduce tobacco use, the excise tax would simply increase the cigarette smuggling business across the country, including in Michigan:

“Michigan and other states have a smuggling problem and it could get worse,” the ed-op states. “Legislation was introduced in the U.S. Congress earlier this year that would hike the federal excise tax by $1.00 per pack, making smuggling into the country even more attractive.”

At the same time, the U.S. Food and Drug Administration (FDA) is pushing for a complete ban on menthol-flavored cigarettes, something the Capitol Confidential says will result in opposite effects.

“Menthol cigarettes make up more than 30% of the combustible cigarette market, by one measure,” the ed-op counters. “Enacting either of these changes alone would light up cigarette smuggling, but taking them together risks dramatically increasing America’s pool of tax cheats.”

The Campaign Confidential stated that high excise taxes lead people and organized crime cells to look for cheaper alternatives to save and make money.

“We estimate that through 2019, nearly one-fifth of all the cigarettes consumed in the Great Lake State — 19%, to be precise — were smuggled from another taxing jurisdiction,” states the editorial. “That is just one reason lawmakers should be wary of even higher cigarette excise taxes. The $2.00 per pack currently imposed by the state is enough to inspire significant smuggling as it is.”

The Tax Foundation found that in 2018, Michigan, which has a $2.00 excise tax on cigarettes, showed a Consumption Smuggled positive inflow of 19.7 percent which, traditionally has been consumers buying cigarettes in low-tax states, then selling in high-tax states. While this practice is widespread in the United States, other methods for evading federal, state, and local taxes are popular. The Tax Foundation stated. One way that criminals grow their profits is by avoiding the legal market completely. They produce counterfeit cigarettes with the look and feel of legitimate brands and sell them with counterfeit tax stamps. Many of these products are smuggled from China, with one source estimating that Chinese counterfeiters produce 400 billion cigarettes per year to meet international demand The Tax Foundation is the nation’s leading independent tax policy 501(c)(3) nonprofit.

On March 15, 2021, the Campaign for Tobacco-Free Kids (tobaccofreekids.org) asserted that: “Every state that has significantly increased its cigarette tax has enjoyed substantial increases in revenue, even while reducing smoking. Higher tobacco taxes also save money by reducing tobacco-related health care costs, including Medicaid expenses. States can realize even greater health benefits and cost savings by allocating some of the revenue to programs that prevent children from smoking and help smokers quit.”

Data does not support that assertion, however. The Capitol Confidential estimates the degree to which cigarettes are brought in from nearby locations, such as Indiana, versus those that are shipped from longer distances, say, North Carolina.

“We separate types of smuggling into two categories: casual and commercial,” the report states. “Casual smuggling usually involves individuals picking up a small number of smokes for personal consumption in a different taxing jurisdiction and then bringing them home. Of Michigan’s total smuggling rate, about 11 percentage points can be attributed to this behavior. The rest involve larger, long-distance shipments.”

The op-ed cited an example of the Michigan State Police reported that illicit smokes were arriving from overseas and picked up at UPS stores in East Lansing, West Bloomfield, Farmington Hills, Southfield, Howell, Westland and Ann Arbor, among other cities. The recipient was a Chinese national and Michigan State University student who reported maintaining 21 different keys to mailboxes at UPS outlets where he would receive the cigarettes. During his initial interview with police, the provided investigators with the tracking numbers for 18 packages still bound for Michigan from China. At one Ann Arbor UPS location, troopers learned from an employee there that an estimated 76 packages arrived for the suspect at this one address and an apparent accomplice from February through December 2019.

The Michigan Dept. of Treasury has tried to put a positive spin on unspecified amounts of revenue the state has expended on the smuggling issue, stating on its site that:

“Since the enactment of the Tobacco Products Tax Act in 1994, the Michigan State Police Tobacco Tax Team has worked with the Michigan Department of Treasury, Michigan Attorney General, and Michigan Department of Community Health to enforce the law. The Team has made more than 668 arrests and has seized more than 291,160 cartons of cigarettes, with an estimated value of $6.8 million.

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