Canary in a Cigarette Smuggling Coal Mine

– July 9, 2023 Reading Time: 3 minutes

Since 2008 we have published (with the Washington, D.C.-based Tax Foundation) estimates on the degree to which cigarettes are smuggled, by state, including those exported to Canada or imported from Mexico. New rules to ban menthol cigarettes being considered by the Food and Drug Administration may dramatically hike cigarette smuggling.

Our most recent estimates indicate that one state, Massachusetts, may represent something of a warning shot across the FDA policy bow. The Bay State banned menthol cigarettes in 2020. When factoring the ban into our statistical model we find that Massachusetts smuggling leaps to 38 percent of the market, or to fourth from its pre-ban rank of twelfth in 2019. Without the ban the state’s smuggling rate would be much lower.

Our estimates rely on a statistical model that is designed to measure the difference between the number of cigarettes that should be getting smoked, as measured by federal smoking rate data, and legal paid sales. The difference between each needs to be explained. We believe it is a function of tax evasion and avoidance, or what we call “smuggling.”

By one measure, menthol cigarettes alone represent 37 percent of the United States cigarette market. Smuggling data suggest that people haven’t stopped smoking in Massachusetts, but rather have made a run for the border. According to the 2023 Massachusetts illegal tobacco task force report, “Inspectors and investigators are routinely encountering or seizing menthol cigarettes, originally purchased in surrounding states…”

The Food and Drug Administration may ban menthol cigarettes very soon. The result will likely be a massive uptick in smuggling by transnational criminals from China to Latin America and beyond.

The China connection is worth lingering over due to China’s status as a major source nation for both legal (but untaxed) and illicit cigarettes, including counterfeit ones. “[T]he annual number of counterfeit cigarettes produced globally is estimated at several billion, and China is considered the main source country,” says a 2015 study supported by the FDA and titled, “Understanding the US Illicit Tobacco Market.” That same study cites a 2010 industry source indicating that China is responsible for about 80 percent of the world’s counterfeit cigarettes.

A 2010 study titled “The Dragon Breath’s Smoke” tried to quantify the number of counterfeit operators in China. The authors noted that from 2002 through 2008 there were nearly 1.5 million cases of detected cigarette counterfeiting there. These represent only the cases of which Chinese authorities were aware.

A 2021 investigative journalism report has said that one Chinese state-backed company that purportedly manufactures more than half of all the cigarettes in the world is “flooding countries with cigarettes and working with smuggling networks that move them into Latin America, Europe, and the Middle East.” It’s not hard to see how that flood might reach US markets.

Outlawing more than one-third of the US cigarette market would announce to criminals far and wide that there massive new profit opportunities were available in the United States. In addition, it is likely that other contraband would ride in on old and new supply chains. Experience shows those chains can include drugs, weapons, people, and counterfeit US cash among other things.

Even without a nationwide ban, flavored cigarettes still arrive in the United States illegally.

In 2021 a Chinese national attending school at Michigan State University got busted for his role in a cigarette smuggling ring. He maintained 21 United Parcel Service keys for boxes through which he would receive cigarettes from overseas sources. Michigan State Police included a photo of a confiscated case of Marlboros as evidence in their investigation. This product is a menthol-flavored one, is only sold legally overseas, and is likely counterfeit.

Those are just two players from one country. China may be the world’s largest producer of illicit cigarettes, but it is not the only country from which cigarettes originate, pass through, or get sold illegally in US markets.

Banning menthol cigarettes would only exacerbate America’s substantial trade in cigarette tax evasion and avoidance, this time with an assist from transnational crime syndicates. We need look no further than what has happened in Massachusetts for insights into how smuggling will leap under such a ban.

Michael LaFaive is the senior director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute in Midland, Michigan.