Cigarette Smuggling:

Information on Interstate and U.S.-Canadian Activity

T-RCED-98-182: Published: May 4, 1998. Publicly Released: May 4, 1998.

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Lawrence J. Dyckman
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GAO discussed its work on cigarette smuggling, focusing on: (1) interstate cigarette smuggling in the United States; and (2) Canada's experience with international smuggling.

GAO noted that: (1) smuggling cigarettes from low- to high-tax states, or interstate smuggling, prominent in the 1970s, may now be a reemerging problem; (2) such activity is likely to occur when the differences in cigarette taxes across the states are significant enough to make it profitable; (3) recently, many states have opted to sharply increase their cigarette taxes; (4) yet most low-tax states have not; (5) as a result, recent studies suggest that the level of interstate smuggling activity may now be increasing; (6) in fact, recent estimates suggest that smuggling is responsible for states collectively losing hundreds of millions of dollars in annual tax revenues; (7) in addition, recent experiences demonstrate that international smuggling can occur when cigarette tax differentials are substantial; (8) international smuggling has occurred recently between Canada and the United States; (9) according to the Canadian government, sharp increases in Canadian federal and provincial cigarette taxes in the late 1980s and early 1990s led to large-scale smuggling between the United States and Canada conducted almost entirely by organized crime; (10) violence increased, merchants suffered, and in one year alone, Canada and its provinces lost over $2 billion (in Canadian dollars) in tax revenues; (11) Canada responded in 1994 by sharply reducing federal and provincial cigarette taxes and increasing its enforcement efforts, among other steps; and (12) since then, smuggling has declined considerably.

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