Cigarette Smuggling:

Interstate and U.S.-Canadian Experience

T-RCED-98-50: Published: Dec 9, 1997. Publicly Released: Dec 9, 1997.

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Robert A. Robinson
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Office of Public Affairs
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GAO discussed: (1) information developed concerning interstate cigarette smuggling in the United States; and (2) Canada's recent 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, yet most low tax states have not; (4) as a result, studies suggest that the level of interstate smuggling activity may now be increasing; (5) recent estimates suggest that smuggling is responsible for states collectively losing hundreds of millions of dollars in annual tax revenue; (6) recent experiences demonstrate that international smuggling can occur when cigarette tax rates are substantial; (7) international smuggling has occurred recently between Canada and the United States; (8) 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; (9) violence increased, merchants suffered, and in one year alone, Canada and its provinces lost over $2 billion (in Canadian dollars) in tax revenues; (10) Canada responded in 1994 by sharply reducing federal and provincial cigarette taxes and increasing its enforcement efforts, among other steps; and (11) since then, smuggling has declined considerably.

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