September 19, 2023 • 18 mins
Step into the shadows of illicit trade where taxation, incentives, and criminal networks intersect to fuel the lucrative cigarette smuggling market.
Adam Hoffer, the Director of Excise Tax Policy, joins Kyle Hulehan to shed light on how substantial price markups on legal cigarettes pave the way for tempting tax avoidance opportunities. They unravel the unintended consequences of cigarette taxation and explore strategies to combat this burgeoning illicit trade
Links:
https://taxfoundation.org/blog/illicit-trade-taxes-counterfeit-cigarettes/
https://taxfoundation.org/blog/california-flavored-tobacco-ban-revenue/
https://taxfoundation.org/blog/new-york-cigarette-tax-flavor-ban/
https://taxfoundation.org/data/all/state/cigarette-taxes-cigarette-smuggling-2022/
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Kyle Hulehan (00:00):
There's a prohibition you don't know
about.
Today we're diving into theshadows where billions of
dollars change hands every year,all under the cloak of smoke and
mirrors.
A world where smugglers,counterfeiters, and black market
moguls have turned an age oldindustry into a complex global
operation.
All over a product you might seeevery day.
(00:23):
Cigarettes.
We'll explore the toll thisunderground economy takes on
public health and governmentcoffers, and see if there are
solutions to these problemsthrough better excise tax
policy.
Hello and welcome to theDeduction a Tax Foundation
podcast.
I'm still your host, KyleHoulahan, and today we are
(00:43):
joined by Adam Hoffer, ourdirector of Excise Tax Policy.
Adam, I'm excited to have youhere today.
This is actually like one of myfavorite parts of the job.
I get to just chat withcoworkers who I might not get to
talk to as much, and.
Learn from them.
So this is gonna be a funepisode, and I'll start by just
(01:05):
lobbing you a softball.
Adam, how are you?
Adam Hoffer (01:09):
Oh, hi Kyle.
I'm well, thanks for having meon.
Uh, this is, it is Fall here.
Uh, I'm a virtual employee.
I live in Wisconsin and Iabsolutely love it this time of
year.
It's a great day and I'm reallyExcited to talk about taxes and
illicit trade today.
Kyle Hulehan (01:27):
Yeah, you're gonna be shoveling snow soon.
But for now we'll just focus onthe taxes.
So the last time you were onthis podcast, you talked about
the importance of tax design,today I was hoping we could
discuss the consequences oftaxes.
Specifically the rise in blackmarkets and illicit trade.
(01:50):
Could you just talk us throughhow those are connected to
illicit trade?
Adam Hoffer (01:57):
Yeah, I, I think this is a really important
concept in the tax world.
We have to remember that there'sa fundamental rule that we
follow in economics and basichuman psychology, and it's that
people respond to incentives.
When policymakers increase thetax on a pack of cigarettes, for
example, incentives are front incenter.
As part of that discussion, werecognize that consumers will
(02:19):
respond to higher prices.
By purchasing and smoking less.
It's a simple incentive story.
However, incentives also createunintended consequences in tax
policy.
As tax induced prices increase.
The incentives also increase forboth suppliers to illegally
provide non-tax products and forcustomers to purchase those
(02:40):
lower priced, non-taxed productsacross the country, taxes add an
average of about 77%.
To the price of illegally, uh,purchase pack of cigarettes.
And that means that by changingnothing at all about the product
other than dodging taxes, blackmarket operators can sell
products at a massive discountto consumers.
Kyle Hulehan (03:03):
And some of the, the tax markups are a lot more
than 70%?
Adam Hoffer (03:08):
Yeah, I mean, they can go a lot higher.
Uh, New York City, for example,the markup is more than 300%.
Uh, I don't think it'll surprisemany listeners to hear that
there are robust smuggling andillicit trade activities going
on in New York.
Uh, we, our data suggests thatmore than half the cigarettes
consumed in the state of NewYork are not purchased in New
(03:29):
York.
They're smuggled in orpurchased.
In the black market or illegallysomehow.
Kyle Hulehan (03:36):
I mean, it, it feels like some, policy makers
and health advocates, they'retrying to make cigarettes so
expensive through taxes that,that no one could afford to buy
them.
That's what they're trying todo, right.
Adam Hoffer (03:49):
That's exactly what they're trying to do.
There's a concept economistsrefer to as prohibition by
price.
At the extreme, if taxes were sohigh that a pack of cigarettes
were as expensive as a an entireyear's salary, nobody would buy
them legally.
So even without legislativeaction to prohibit the sale of a
(04:09):
product, taxes can be so highthat you Functionally end up
with a prohibition by price orby tax.
I think it's useful to think oftaxes as putting products on a
spectrum where on one end youhave a basic unencumbered
market, and on the other extremeyou have complete prohibition.
Every dollar of tax that isadded to a product in a market
(04:34):
moves the market a littlefurther from the free market and
closer to prohibition, and witheach movement toward
prohibition, a separate blackmarket grows.
Kyle Hulehan (04:46):
So as these black markets grow, I mean, how, how
significant does that make theglobal illicit trade and what's
maybe triggering that growth?
Adam Hoffer (04:58):
Yeah.
Uh, the, the global illicitmarket is enormous in, in
tobacco, for example.
Uh, you know, well, Lemme startby saying that, it's really hard
to get good data on illicitillegal markets, but using the
best that we have, our estimatesput the size of the Chinese
counterfeit tobacco productionmarket at more than 400 billion
(05:19):
cigarettes per year.
Their staple product is called acheap white or illicit white.
These are generic lookingcigarettes produced legally in
their home country.
So again, mostly China.
But uh, we also see, uh, severalplaces both in Eastern Europe
and throughout Eastern Asia.
Uh, these generic lookingproducts are produced legally in
(05:42):
their home country, but they'reoften designed for exporting
into high tax markets.
Kyle Hulehan (05:50):
So with these being designed to, you know,
export in the high tax markets,what I mean, what dangers do
counterfeit cigarettes pose, youknow, especially from China
compared to legally manufacturedones.
Adam Hoffer (06:04):
Yeah, I mean, we know legally manufactured
cigarettes are dangerous toconsume, but there are also even
greater dangers frominternationally smuggled
products that don't have to liveup to any sort of quality
control standard or productmanufacturing standard.
Uh, researchers have found thatcounterfeit cigarettes have as
(06:25):
much as seven times the amountof lead.
As authentic American brands andclose to three times as much
thallium, that's a toxic metal.
Uh, other reports have foundthings like insect eggs, dead
flies, mold, uh, and even humanfeces in these counter
counterfeit cigarettes.
It's, it's a whole differentworld whenever you move from
(06:48):
producing something that's Sold,regulated and done so legally
to, uh, something that getssmuggled, you know, inside and
hidden in chipping containers.
Kyle Hulehan (07:00):
Wow.
As someone who's only smokedjust a few cigarettes in their
day, uh, it's pretty scary tothink that counterfeits
cigarettes could really havethese kind of dangers.
It kind of makes you think twiceabout it a little bit, but I
don't wanna get too far from thepoint here.
To stay on track how does, youknow the hike in cigarette tax
rates correlate with the, theincrease in smuggling?
(07:24):
As you've seen through theevidence in empirical studies.
Adam Hoffer (07:28):
Yeah, our estimates suggest that a$1 increase per
pack of cigarettes in the UnitedStates increases smuggling at
the state level by an average of31%.
That's a really big jump.
Uh, other academic studies havehave looked at this more
globally, uh, and, an estimatethat we, uh, refer to quite
(07:49):
often is that a one Euroincrease in the tax per pack of
cigarettes would increaseillicit market share of the
total market by five to 12percentage points, and then also
increase illicit cigarette salesby 29 to up to 95%.
Kyle Hulehan (08:08):
So how, how do individual states with their,
you know, policies, those in,New York, Massachusetts, or
California, how does thatinfluence the local cross border
elicit cigarette trade?
Adam Hoffer (08:22):
One of the beauties of the American system is that
we get these, uh, series ofexperiments at the state level.
We can see what happens whenstates implement a policy.
So Massachusetts and Californiawere the first two states in the
country to ban the sale ofmenthol cigarettes.
Massachusetts did so in 2020,and California just did so, uh,
(08:43):
in late 2022.
Now we're still gathering ourdata on California.
We have some early impacts, butwe have some good data and we,
we've had time to collect it inMassachusetts.
Uh, the flavor ban inMassachusetts, the year after
the flavor ban passed, sales ofcigarettes in Massachusetts fell
24%, but we could track nine outof 10 of every one of those
(09:07):
packs no longer sold inMassachusetts.
We could track them to increasedsales in neighboring states.
In California, our earlyestimates suggest that we're not
seeing the uptick in sales andneighboring states.
Instead what our, uh,preliminary data suggests is
that the offset in sales inCalifornia is likely going to be
(09:28):
driven from, uh, either productcoming across the border from
Mexico, or, uh, it's productthat has been earmarked or
labeled for export that is just,uh, vanishing out of warehouses
and never really being exported.
New York just implemented a$1per pack cigarette tax increase
(09:49):
effective September, 2023.
For the first time in my career,I saw the state fiscal agency
actually estimated that therevenue hike, or, or, sorry,
that the, uh, rate hike wasgoing to create a revenue loss.
Uh, or in other words, thefiscal agency acknowledged that
the increase in the tax per packwould drive even more consumers
(10:11):
away from legal markets.
Again, we already know that overhalf the market in New York,
exists on black markets orsmuggled across state lines, uh,
and we just expect thatpercentage to increase after
this new rate hike.
Kyle Hulehan (10:27):
Not that you know Massachusetts, California and
New York, wherever the bastionsof tax policy or anything that
we would necessarily recommendat times, but that's pretty
baffling that a state wouldenact something that they know
would likely drive people awayfrom legal markets.
(10:48):
It, it's hard to make sense ofthat for me.
How might you know US policyinadvertently boost elicit trade
both domestically and globally?
Adam Hoffer (11:00):
I think we've already seen the FDA play an
enormous role in the developmentof illicit tobacco trade by
failing to approve any flavoredvaping products whatsoever.
The exact kinds of products thatthe F D A has stated, it wants
more smokers to switch to.
The agency facilitated athriving black market in the
(11:21):
vaping space.
Estimate suggests thatnon-approved disposable vaping
products now make up themajority of the market for sale
in the United States, across thewhole country.
Products that are not approvedfor sale, in the United States
now make up the majority ofdisposable vaping sales.
This is a, this is a really bigproblem and, uh, all parties,
(11:45):
the f d A, and authorities arehaving difficulty, reigning this
market in.
But on the horizon, the F d Ahas major action items that
could make these effects lookreally small.
Uh, on the FDA's uh, upcomingagenda, we see, uh, a final
(12:05):
decision on whether or not toimplement a nationwide menthol
flavor ban.
And then also, uh, they haveexpressed interest in putting
out a new product ruling thatwould essentially be a
prohibition on cigarettes by,uh, mandating that all Tobacco
(12:26):
products carry a very lownicotine content.
Uh, either of these would fuelillicit activity to heights that
we haven't seen in this country.
Uh, it's has the potential toreally change the entire market
and illicit activity is likelyto explode.
Kyle Hulehan (12:45):
Uh, and with, you know, illicit activity likely to
explode.
There's, there's this governmentreport, uh, that you had shown
to me the global illicit tradein tobacco, and I see on there.
That there's these operationslike Operation Black Poseidon,
which was a seizure of 30 tonsof cut tobacco with nearly
350,000, uh, ready to sellcigarettes.
(13:07):
That was, you know, estimated atthis value of$560,000.
And then there was OperationSmoke Out, which was a seizure
of 4,000 cartons of untaxedcigarettes.
22,000 untaxed cigars and nearly$400,000 in cash property.
So like, and that's before thesemeasures have been put in place.
(13:31):
So, you know, beyond the lostrevenue, how does cigarette
smuggling, you know, link tothese other illicit activities?
Adam Hoffer (13:38):
Well, this is the bigger problem.
Yes, there are dangers of badproducts in illegal markets, but
on top of those problems, everysuccessful illegal sale funds
the operations of these criminalorganizations and all the other
activities those criminalorganizations do.
Cigarette smuggling is a cashcow operation for these criminal
(14:00):
organizations.
Really low risk, really highreward.
Studies have linked cigarettesmuggling organizations and the
funds generated throughcigarette smuggling to
corruption, money laundering,uh, and yes terrorism.
Uh, these illegal markets are areally big problem.
Kyle Hulehan (14:19):
Yeah, very clearly they are a huge problem and, and
something that needs to getsorted out and something maybe
that, tax policy could have alittle say in, but what, what
are the potential solutions forgovernment?
We don't wanna just, talk aboutissues here.
We wanna provide something, somesolutions and, what could
international bodies employ, youknow, to combat the rising
(14:40):
illicit tobacco trade withoutcreating, you know, even more
market distortions.
Adam Hoffer (14:48):
I think the most important first step is to
recognize and acknowledge thatsmuggling activity exists and
it's a threat to public policy.
So let's remember that the goalof public policy should be to
improve wellbeing smuggling andillicit trade, threaten the
ability of excise taxes toimprove wellbeing.
We've seen a direct effort byorganizations around the globe
(15:11):
to sort of pretend likesmuggling doesn't exist, and to
say that, well smuggling mightexist, but if so, all you need
is some more enforcement, andthe problem will go away.
I'd like to see smugglingestimates incorporated into the
actual estimates of, of what theimpact of a policy is going to
(15:32):
be.
And I'd also like to offer analternative perspective for
public policy here to consider.
What if public policy tried tominimize and eliminate illicit
market activity through lowertaxes and friendlier regulation,
not just from brute police forceinstead of trying to manipulate.
(15:52):
Control the decisions ofconsenting adults participating
in legal markets.
I think that reducing illegalmarket activity would've a much
more profound impact on humanwellbeing, both here in the
United States and around theworld.
Kyle Hulehan (16:05):
Adam, as, as we're closing out here, I, I mean,
this is a fascinating episode.
I really could not have guessedthat illegal tobacco trade had
all of these, this, this web ofconnections out to these illegal
markets, to all of thesedifferent things.
So, so as we're closing, youknow, maybe we'll have you on
some day to discuss somethingjust a little bit more wholesome
(16:26):
than black markets and illicittrade.
But is there anything that you'dlike to promote or share with
our audience or throw out thatyou're working on right now?
Adam Hoffer (16:35):
Yeah, I mean, I, I would like to also say we, we
spent, uh, the whole episodetalking about tobacco.
This is also the case for allother things to get excise
taxes.
Uh, and there's a lot morepublic policy on the horizon in
the US and around the world, uh,on issues like alcohol, sports
betting, cannabis.
Uh, there's gonna be a realchange in public policy in the
(16:56):
future, and again, I would liketo see this, uh, public policy
improve the wellbeing of peoplearound the world.
Uh, in the upcoming months, wehave, uh, a new edition of our
cigarette smuggling reportscoming out.
This will be our first yearwith, uh, data covering the full
Massachusetts.
I.
A flavor ban and we'll be ableto show exactly, uh, how much
(17:18):
smuggling increased forMassachusetts.
Uh, give a slight teaser of theresults.
It's a lot.
uh, smuggling went up a lot inthe state.
We also have, uh, one of thethings we're going to try to
estimate later this year, uh, Imentioned the illegal, uh,
disposable vaping market.
We're gonna try to do someresearch into whether or not
(17:39):
these vendors are remittingtaxes on these vapor sales or
not.
So there's a lot of reallyinteresting work going on in the
excise space, uh, and I verymuch look forward to doing that
and being able to come back onthe podcast to talk about it.
Kyle Hulehan (17:53):
Absolutely Adam, you're welcome here anytime.
This has been another episode ofthe deduction to learn more
about the tax foundation and thededuction.
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(18:14):
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Thank you all for listening, andwe'll see you next time.
There's a prohibition you don't know
about.
Today we're diving into theshadows where billions of
dollars change hands every year,all under the cloak of smoke and
mirrors.
A world where smugglers,counterfeiters, and black market
moguls have turned an age oldindustry into a complex global
operation.
All over a product you might seeevery day.
(00:23):
Cigarettes.
We'll explore the toll thisunderground economy takes on
public health and governmentcoffers, and see if there are
solutions to these problemsthrough better excise tax
policy.
Hello and welcome to theDeduction a Tax Foundation
podcast.
I'm still your host, KyleHoulahan, and today we are
(00:43):
joined by Adam Hoffer, ourdirector of Excise Tax Policy.
Adam, I'm excited to have youhere today.
This is actually like one of myfavorite parts of the job.
I get to just chat withcoworkers who I might not get to
talk to as much, and.
Learn from them.
So this is gonna be a funepisode, and I'll start by just
(01:05):
lobbing you a softball.
Adam, how are you?
Adam Hoffer (01:09):
Oh, hi Kyle.
I'm well, thanks for having meon.
Uh, this is, it is Fall here.
Uh, I'm a virtual employee.
I live in Wisconsin and Iabsolutely love it this time of
year.
It's a great day and I'm reallyExcited to talk about taxes and
illicit trade today.
Kyle Hulehan (01:27):
Yeah, you're gonna be shoveling snow soon.
But for now we'll just focus onthe taxes.
So the last time you were onthis podcast, you talked about
the importance of tax design,today I was hoping we could
discuss the consequences oftaxes.
Specifically the rise in blackmarkets and illicit trade.
(01:50):
Could you just talk us throughhow those are connected to
illicit trade?
Adam Hoffer (01:57):
Yeah, I, I think this is a really important
concept in the tax world.
We have to remember that there'sa fundamental rule that we
follow in economics and basichuman psychology, and it's that
people respond to incentives.
When policymakers increase thetax on a pack of cigarettes, for
example, incentives are front incenter.
As part of that discussion, werecognize that consumers will
(02:19):
respond to higher prices.
By purchasing and smoking less.
It's a simple incentive story.
However, incentives also createunintended consequences in tax
policy.
As tax induced prices increase.
The incentives also increase forboth suppliers to illegally
provide non-tax products and forcustomers to purchase those
(02:40):
lower priced, non-taxed productsacross the country, taxes add an
average of about 77%.
To the price of illegally, uh,purchase pack of cigarettes.
And that means that by changingnothing at all about the product
other than dodging taxes, blackmarket operators can sell
products at a massive discountto consumers.
Kyle Hulehan (03:03):
And some of the, the tax markups are a lot more
than 70%?
Adam Hoffer (03:08):
Yeah, I mean, they can go a lot higher.
Uh, New York City, for example,the markup is more than 300%.
Uh, I don't think it'll surprisemany listeners to hear that
there are robust smuggling andillicit trade activities going
on in New York.
Uh, we, our data suggests thatmore than half the cigarettes
consumed in the state of NewYork are not purchased in New
(03:29):
York.
They're smuggled in orpurchased.
In the black market or illegallysomehow.
Kyle Hulehan (03:36):
I mean, it, it feels like some, policy makers
and health advocates, they'retrying to make cigarettes so
expensive through taxes that,that no one could afford to buy
them.
That's what they're trying todo, right.
Adam Hoffer (03:49):
That's exactly what they're trying to do.
There's a concept economistsrefer to as prohibition by
price.
At the extreme, if taxes were sohigh that a pack of cigarettes
were as expensive as a an entireyear's salary, nobody would buy
them legally.
So even without legislativeaction to prohibit the sale of a
(04:09):
product, taxes can be so highthat you Functionally end up
with a prohibition by price orby tax.
I think it's useful to think oftaxes as putting products on a
spectrum where on one end youhave a basic unencumbered
market, and on the other extremeyou have complete prohibition.
Every dollar of tax that isadded to a product in a market
(04:34):
moves the market a littlefurther from the free market and
closer to prohibition, and witheach movement toward
prohibition, a separate blackmarket grows.
Kyle Hulehan (04:46):
So as these black markets grow, I mean, how, how
significant does that make theglobal illicit trade and what's
maybe triggering that growth?
Adam Hoffer (04:58):
Yeah.
Uh, the, the global illicitmarket is enormous in, in
tobacco, for example.
Uh, you know, well, Lemme startby saying that, it's really hard
to get good data on illicitillegal markets, but using the
best that we have, our estimatesput the size of the Chinese
counterfeit tobacco productionmarket at more than 400 billion
(05:19):
cigarettes per year.
Their staple product is called acheap white or illicit white.
These are generic lookingcigarettes produced legally in
their home country.
So again, mostly China.
But uh, we also see, uh, severalplaces both in Eastern Europe
and throughout Eastern Asia.
Uh, these generic lookingproducts are produced legally in
(05:42):
their home country, but they'reoften designed for exporting
into high tax markets.
Kyle Hulehan (05:50):
So with these being designed to, you know,
export in the high tax markets,what I mean, what dangers do
counterfeit cigarettes pose, youknow, especially from China
compared to legally manufacturedones.
Adam Hoffer (06:04):
Yeah, I mean, we know legally manufactured
cigarettes are dangerous toconsume, but there are also even
greater dangers frominternationally smuggled
products that don't have to liveup to any sort of quality
control standard or productmanufacturing standard.
Uh, researchers have found thatcounterfeit cigarettes have as
(06:25):
much as seven times the amountof lead.
As authentic American brands andclose to three times as much
thallium, that's a toxic metal.
Uh, other reports have foundthings like insect eggs, dead
flies, mold, uh, and even humanfeces in these counter
counterfeit cigarettes.
It's, it's a whole differentworld whenever you move from
(06:48):
producing something that's Sold,regulated and done so legally
to, uh, something that getssmuggled, you know, inside and
hidden in chipping containers.
Kyle Hulehan (07:00):
Wow.
As someone who's only smokedjust a few cigarettes in their
day, uh, it's pretty scary tothink that counterfeits
cigarettes could really havethese kind of dangers.
It kind of makes you think twiceabout it a little bit, but I
don't wanna get too far from thepoint here.
To stay on track how does, youknow the hike in cigarette tax
rates correlate with the, theincrease in smuggling?
(07:24):
As you've seen through theevidence in empirical studies.
Adam Hoffer (07:28):
Yeah, our estimates suggest that a$1 increase per
pack of cigarettes in the UnitedStates increases smuggling at
the state level by an average of31%.
That's a really big jump.
Uh, other academic studies havehave looked at this more
globally, uh, and, an estimatethat we, uh, refer to quite
(07:49):
often is that a one Euroincrease in the tax per pack of
cigarettes would increaseillicit market share of the
total market by five to 12percentage points, and then also
increase illicit cigarette salesby 29 to up to 95%.
Kyle Hulehan (08:08):
So how, how do individual states with their,
you know, policies, those in,New York, Massachusetts, or
California, how does thatinfluence the local cross border
elicit cigarette trade?
Adam Hoffer (08:22):
One of the beauties of the American system is that
we get these, uh, series ofexperiments at the state level.
We can see what happens whenstates implement a policy.
So Massachusetts and Californiawere the first two states in the
country to ban the sale ofmenthol cigarettes.
Massachusetts did so in 2020,and California just did so, uh,
(08:43):
in late 2022.
Now we're still gathering ourdata on California.
We have some early impacts, butwe have some good data and we,
we've had time to collect it inMassachusetts.
Uh, the flavor ban inMassachusetts, the year after
the flavor ban passed, sales ofcigarettes in Massachusetts fell
24%, but we could track nine outof 10 of every one of those
(09:07):
packs no longer sold inMassachusetts.
We could track them to increasedsales in neighboring states.
In California, our earlyestimates suggest that we're not
seeing the uptick in sales andneighboring states.
Instead what our, uh,preliminary data suggests is
that the offset in sales inCalifornia is likely going to be
(09:28):
driven from, uh, either productcoming across the border from
Mexico, or, uh, it's productthat has been earmarked or
labeled for export that is just,uh, vanishing out of warehouses
and never really being exported.
New York just implemented a$1per pack cigarette tax increase
(09:49):
effective September, 2023.
For the first time in my career,I saw the state fiscal agency
actually estimated that therevenue hike, or, or, sorry,
that the, uh, rate hike wasgoing to create a revenue loss.
Uh, or in other words, thefiscal agency acknowledged that
the increase in the tax per packwould drive even more consumers
(10:11):
away from legal markets.
Again, we already know that overhalf the market in New York,
exists on black markets orsmuggled across state lines, uh,
and we just expect thatpercentage to increase after
this new rate hike.
Kyle Hulehan (10:27):
Not that you know Massachusetts, California and
New York, wherever the bastionsof tax policy or anything that
we would necessarily recommendat times, but that's pretty
baffling that a state wouldenact something that they know
would likely drive people awayfrom legal markets.
(10:48):
It, it's hard to make sense ofthat for me.
How might you know US policyinadvertently boost elicit trade
both domestically and globally?
Adam Hoffer (11:00):
I think we've already seen the FDA play an
enormous role in the developmentof illicit tobacco trade by
failing to approve any flavoredvaping products whatsoever.
The exact kinds of products thatthe F D A has stated, it wants
more smokers to switch to.
The agency facilitated athriving black market in the
(11:21):
vaping space.
Estimate suggests thatnon-approved disposable vaping
products now make up themajority of the market for sale
in the United States, across thewhole country.
Products that are not approvedfor sale, in the United States
now make up the majority ofdisposable vaping sales.
This is a, this is a really bigproblem and, uh, all parties,
(11:45):
the f d A, and authorities arehaving difficulty, reigning this
market in.
But on the horizon, the F d Ahas major action items that
could make these effects lookreally small.
Uh, on the FDA's uh, upcomingagenda, we see, uh, a final
(12:05):
decision on whether or not toimplement a nationwide menthol
flavor ban.
And then also, uh, they haveexpressed interest in putting
out a new product ruling thatwould essentially be a
prohibition on cigarettes by,uh, mandating that all Tobacco
(12:26):
products carry a very lownicotine content.
Uh, either of these would fuelillicit activity to heights that
we haven't seen in this country.
Uh, it's has the potential toreally change the entire market
and illicit activity is likelyto explode.
Kyle Hulehan (12:45):
Uh, and with, you know, illicit activity likely to
explode.
There's, there's this governmentreport, uh, that you had shown
to me the global illicit tradein tobacco, and I see on there.
That there's these operationslike Operation Black Poseidon,
which was a seizure of 30 tonsof cut tobacco with nearly
350,000, uh, ready to sellcigarettes.
(13:07):
That was, you know, estimated atthis value of$560,000.
And then there was OperationSmoke Out, which was a seizure
of 4,000 cartons of untaxedcigarettes.
22,000 untaxed cigars and nearly$400,000 in cash property.
So like, and that's before thesemeasures have been put in place.
(13:31):
So, you know, beyond the lostrevenue, how does cigarette
smuggling, you know, link tothese other illicit activities?
Adam Hoffer (13:38):
Well, this is the bigger problem.
Yes, there are dangers of badproducts in illegal markets, but
on top of those problems, everysuccessful illegal sale funds
the operations of these criminalorganizations and all the other
activities those criminalorganizations do.
Cigarette smuggling is a cashcow operation for these criminal
(14:00):
organizations.
Really low risk, really highreward.
Studies have linked cigarettesmuggling organizations and the
funds generated throughcigarette smuggling to
corruption, money laundering,uh, and yes terrorism.
Uh, these illegal markets are areally big problem.
Kyle Hulehan (14:19):
Yeah, very clearly they are a huge problem and, and
something that needs to getsorted out and something maybe
that, tax policy could have alittle say in, but what, what
are the potential solutions forgovernment?
We don't wanna just, talk aboutissues here.
We wanna provide something, somesolutions and, what could
international bodies employ, youknow, to combat the rising
(14:40):
illicit tobacco trade withoutcreating, you know, even more
market distortions.
Adam Hoffer (14:48):
I think the most important first step is to
recognize and acknowledge thatsmuggling activity exists and
it's a threat to public policy.
So let's remember that the goalof public policy should be to
improve wellbeing smuggling andillicit trade, threaten the
ability of excise taxes toimprove wellbeing.
We've seen a direct effort byorganizations around the globe
(15:11):
to sort of pretend likesmuggling doesn't exist, and to
say that, well smuggling mightexist, but if so, all you need
is some more enforcement, andthe problem will go away.
I'd like to see smugglingestimates incorporated into the
actual estimates of, of what theimpact of a policy is going to
(15:32):
be.
And I'd also like to offer analternative perspective for
public policy here to consider.
What if public policy tried tominimize and eliminate illicit
market activity through lowertaxes and friendlier regulation,
not just from brute police forceinstead of trying to manipulate.
(15:52):
Control the decisions ofconsenting adults participating
in legal markets.
I think that reducing illegalmarket activity would've a much
more profound impact on humanwellbeing, both here in the
United States and around theworld.
Kyle Hulehan (16:05):
Adam, as, as we're closing out here, I, I mean,
this is a fascinating episode.
I really could not have guessedthat illegal tobacco trade had
all of these, this, this web ofconnections out to these illegal
markets, to all of thesedifferent things.
So, so as we're closing, youknow, maybe we'll have you on
some day to discuss somethingjust a little bit more wholesome
(16:26):
than black markets and illicittrade.
But is there anything that you'dlike to promote or share with
our audience or throw out thatyou're working on right now?
Adam Hoffer (16:35):
Yeah, I mean, I, I would like to also say we, we
spent, uh, the whole episodetalking about tobacco.
This is also the case for allother things to get excise
taxes.
Uh, and there's a lot morepublic policy on the horizon in
the US and around the world, uh,on issues like alcohol, sports
betting, cannabis.
Uh, there's gonna be a realchange in public policy in the
(16:56):
future, and again, I would liketo see this, uh, public policy
improve the wellbeing of peoplearound the world.
Uh, in the upcoming months, wehave, uh, a new edition of our
cigarette smuggling reportscoming out.
This will be our first yearwith, uh, data covering the full
Massachusetts.
I.
A flavor ban and we'll be ableto show exactly, uh, how much
(17:18):
smuggling increased forMassachusetts.
Uh, give a slight teaser of theresults.
It's a lot.
uh, smuggling went up a lot inthe state.
We also have, uh, one of thethings we're going to try to
estimate later this year, uh, Imentioned the illegal, uh,
disposable vaping market.
We're gonna try to do someresearch into whether or not
(17:39):
these vendors are remittingtaxes on these vapor sales or
not.
So there's a lot of reallyinteresting work going on in the
excise space, uh, and I verymuch look forward to doing that
and being able to come back onthe podcast to talk about it.
Kyle Hulehan (17:53):
Absolutely Adam, you're welcome here anytime.
This has been another episode ofthe deduction to learn more
about the tax foundation and thededuction.
Visit us at taxfoundation.
org slash podcast.
You can follow us on Twitter,Facebook, and LinkedIn at tax
foundation.
(18:14):
If you've been enjoying our showand want to help us grow, please
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And if you didn't enjoy thededuction, well, keep it to
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Foundation on our website.
Thank you all for listening, andwe'll see you next time.
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