WEBVTT - Flashback: Episode 2 "Holy Smokes" (Sneak Peek) 0:00:05.559 --> 0:00:08.880 Authorities in North Carolina first started to get suspicious in 0:00:10.360 --> 0:00:12.920 that's when they noticed two odd things near the city 0:00:12.960 --> 0:00:16.840 of Fayetteville. First, there was an unusually large number of 0:00:16.840 --> 0:00:20.120 cigarettes being sold in the area, far more than could 0:00:20.160 --> 0:00:23.919 be explained by local demand. The second, police were stopping 0:00:23.920 --> 0:00:26.799 a number of vehicles along the local interstate highway that 0:00:26.840 --> 0:00:31.760 were carrying cash, lots of cash. The investigation led authorities 0:00:31.760 --> 0:00:35.680 to a plain, gray brick building. This is where investigators 0:00:35.720 --> 0:00:38.479 say it all started. This business behind me here is 0:00:38.520 --> 0:00:41.879 called free Co is listed on Google as a candy business. 0:00:41.920 --> 0:00:44.640 But authorities say what was coming out of here wasn't candy. 0:00:44.920 --> 0:00:48.839 It certainly wasn't. What authorities unearthened Fayetteville last year was 0:00:48.880 --> 0:00:51.600 one of the largest cigarettes smuggling rings of its kind. 0:00:51.800 --> 0:00:55.440 Authorities seized about eight hundred and forty dollars in cash, 0:00:55.560 --> 0:00:59.840 eleven vehicles and four hundred thousand cartons of cigarettes, and 0:01:00.160 --> 0:01:03.080 five guns. More than two dozen people were arrested in 0:01:03.120 --> 0:01:09.120 connection with the twelve million dollar operation. So why is 0:01:09.160 --> 0:01:12.120 there so much money in moving cigarettes across state borders? 0:01:12.400 --> 0:01:14.479 Why would someone in New York even want to buy 0:01:14.520 --> 0:01:17.360 the exact same cigarettes from North Carolina that they can 0:01:17.400 --> 0:01:20.360 buy at home. And most importantly, how did we get 0:01:20.400 --> 0:01:23.280 in this mess in the first place. The answer, as 0:01:23.319 --> 0:01:26.600 we shall see, involves a potent combination of taxes, war, 0:01:26.959 --> 0:01:30.399 and big business. But most of all, the rampant cigarettes 0:01:30.440 --> 0:01:35.040 smuggling in America today is the unintended product of good intentions, 0:01:35.440 --> 0:01:37.560 And if you're looking for someone to blame, you could 0:01:37.600 --> 0:01:40.760 accuse everyone from the smuggler, to the tobacco industry to 0:01:40.840 --> 0:01:44.479 the tax collector. But before you point any fingers, let 0:01:44.480 --> 0:01:46.920 me first tell you a little story about the y 0:01:47.080 --> 0:01:55.920 m c A. I'm Sean Braswell. Welcome to Flashback, a 0:01:56.080 --> 0:01:59.280 history podcast from Aussie. This season, we are diving deep 0:01:59.320 --> 0:02:02.280 into some of the most remarkable and unsettling examples of 0:02:02.400 --> 0:02:06.440 unintended consequences from history. In this episode, we'll see how 0:02:06.480 --> 0:02:08.920 an enormous active virtue by the y m c A 0:02:09.280 --> 0:02:12.320 more than a century ago, continues to lead to all 0:02:12.440 --> 0:02:17.320 manner of vice, including that cigarette smuggling operation in Fayetteville, 0:02:17.360 --> 0:02:24.440 North Carolina. The reason that criminal operations like the one 0:02:24.440 --> 0:02:28.400 in Fayetteville exists is pretty simple. The federal government imposes 0:02:28.440 --> 0:02:31.080 attacks on cigarettes. That's a dollar and one cent per pack. 0:02:31.440 --> 0:02:34.480 Thomas E. Hall is an emeritus economics professor at the 0:02:34.600 --> 0:02:38.320 University of Miami, Ohio and the author of Aftermath, The 0:02:38.400 --> 0:02:42.000 Unintended Consequences of Public Policies. But it doesn't matter where 0:02:42.000 --> 0:02:43.600 you buy them in the United States, you're gonna pay 0:02:43.600 --> 0:02:48.400 the federal tax. What differs are these state taxes and 0:02:48.600 --> 0:02:51.919 the state taxes on cigarettes very a great deal. Some 0:02:52.000 --> 0:02:55.919 states are low tax states, some like New York, are not. 0:02:56.320 --> 0:02:59.080 The state of New York adds attacks of four dollars 0:02:59.080 --> 0:03:02.240 and thirty five cent to a pack of cigarettes. Then 0:03:02.280 --> 0:03:05.040 the City of New York also taxes, and they had 0:03:05.040 --> 0:03:07.200 an additional dollar and fifty cents on to a pack 0:03:07.240 --> 0:03:09.760 of cigarettes. So that means if you bought a pack 0:03:09.760 --> 0:03:12.840 of cigarettes in New York City, uh, there's five dollars 0:03:12.840 --> 0:03:15.359 and eighty five cents of taxes on a pack, or 0:03:15.400 --> 0:03:19.000 close to sixty dollars of tax per carton. North Carolina, 0:03:19.040 --> 0:03:21.480 on the other hand, collect only about five dollars in 0:03:21.560 --> 0:03:24.160 tax per carton. I may be a history buff, but 0:03:24.200 --> 0:03:26.920 even I can do that math. Smugglers can make up 0:03:26.960 --> 0:03:30.880 to fifty five dollars per carton selling North Carolina cigarettes 0:03:30.880 --> 0:03:33.680 in New York. And if each truck of black market 0:03:33.720 --> 0:03:37.760 cigarettes carries about fifty thousand cartons. Then you're talking about 0:03:37.800 --> 0:03:42.080 two point seven million dollars in potential profit per truck. 0:03:42.800 --> 0:03:46.400 Two point seven million dollars per truck. So you can 0:03:46.440 --> 0:03:49.520 see what's going on here. You have this this profit opportunity. 0:03:49.840 --> 0:03:52.880 To say the least, there's more than just an opportunity. 0:03:53.160 --> 0:03:58.080 There's an easily moved commodity. Cigarettes are a product that 0:03:58.520 --> 0:04:02.360 are very easy to move a round because they're they're light, um, 0:04:02.600 --> 0:04:06.120 they're small, and they're durable. This sort of tax arbitrage 0:04:06.160 --> 0:04:09.080 opportunity can play out even within a radius of a 0:04:09.120 --> 0:04:12.760 few miles. I live in Cincinnati, Ohio, and Cincinnati, Ohio 0:04:12.880 --> 0:04:15.960 is a river town. It's on the Ohio River, and 0:04:16.600 --> 0:04:21.120 across the river is the state of Kentucky. Now, Kentucky 0:04:21.200 --> 0:04:24.520 is a tobacco grower. There's a big crop down there. So, 0:04:24.680 --> 0:04:27.680 needless to say, the Kentucky state legislature has an interest 0:04:27.720 --> 0:04:31.680 in keeping its tobacco farmers happy. Now, that means that 0:04:31.960 --> 0:04:34.440 the taxes on tobacco are not as high in Kentucky 0:04:34.480 --> 0:04:36.720 as they are aren't Ohio. In fact, it's a difference 0:04:36.760 --> 0:04:39.520 about fifty cents a pack, which means if you're a 0:04:39.520 --> 0:04:41.880 smoker in Cincinnati, all you have to do to save 0:04:41.960 --> 0:04:44.920 fifty cents for a pack of cigarettes or five dollars 0:04:44.920 --> 0:04:47.960 for a carton is drive across the John A. Robling 0:04:48.080 --> 0:04:51.520 suspension Bridge to Kentucky. And when you cross one of 0:04:51.520 --> 0:04:55.760 those bridges, you'll find one liquor and tobacco store after 0:04:55.800 --> 0:04:59.080 another right there by the river. But the real opportunity 0:04:59.120 --> 0:05:02.239 for smugglers is moving cigarettes from a low tax state 0:05:02.279 --> 0:05:05.000 like North Carolina, where I live, and a high tax 0:05:05.040 --> 0:05:07.799 one like New York. I asked Hall if I should 0:05:07.800 --> 0:05:10.240 be getting in on the action. If you could keep 0:05:10.279 --> 0:05:12.800 the mafia off your back, you can make one helpful 0:05:12.839 --> 0:05:16.400 lot of money moving cigarettes up to New York. It's 0:05:16.440 --> 0:05:19.520 a dangerous business, though, I guess I'll pass. So how 0:05:19.520 --> 0:05:22.320 did we get in this bizarre tax situation? In America? 0:05:23.520 --> 0:05:26.479 The US first started taxing tobacco to help raise money 0:05:26.480 --> 0:05:28.960 for the Civil War, and they continued to do so 0:05:29.040 --> 0:05:32.279 after the war was over. Thomas Holligan Essentially, what the 0:05:32.320 --> 0:05:34.880 government discovered was that this was a great revenue raiser. 0:05:35.240 --> 0:05:39.040 By nineteen thirty, tobacco taxes were generating about fifteen percent 0:05:39.160 --> 0:05:42.919 of the federal government's tax collections four hundred and fifty 0:05:42.960 --> 0:05:46.480 million dollars of annual revenue for about seven billion dollars 0:05:46.480 --> 0:05:49.840 worth today, and soon states wanted in on the action 0:05:49.920 --> 0:05:54.080 to The first state cigarette taxes popped up in nearly 0:05:54.160 --> 0:05:57.520 nineteen twenties, and the reason why they did was because 0:05:57.560 --> 0:06:00.360 we had a fairly bad recession from nineteen we needed 0:06:00.400 --> 0:06:05.279 twenty one and during economic recessions, revenue to governments goes down. 0:06:05.920 --> 0:06:08.120 The states were trying to close their budget upsets, so 0:06:08.160 --> 0:06:12.280 they decided to start taxing cigarettes. In nineteen Iowa became 0:06:12.279 --> 0:06:15.159 the first state to enact the state level cigarette tax. 0:06:15.600 --> 0:06:19.000 By the nineteen thirties, more than thirty other states had followed. 0:06:19.360 --> 0:06:21.800 The original cigarette taxes were pretty low. We're just talking 0:06:21.800 --> 0:06:24.720 about a few pennies on the pack. But that's all 0:06:24.760 --> 0:06:29.520 it took to get the smuggling started, because once you 0:06:29.720 --> 0:06:33.599 impost higher taxes in one area than another, then you 0:06:33.680 --> 0:06:36.479 have this opera economic consent of to buy the cigarettes 0:06:36.480 --> 0:06:38.760 in the low cost area and try to sell them 0:06:38.760 --> 0:06:41.320 into high cost area. Still, there wasn't a whole lot 0:06:41.360 --> 0:06:45.200 of money in smuggling cigarettes yet, and most smugglers were 0:06:45.240 --> 0:06:49.760 still small time criminals. Meanwhile, the popularity of cigarettes in 0:06:49.760 --> 0:06:54.480 America continued to soar even doctors recommended them. Time out 0:06:54.600 --> 0:06:57.520 for many men of medicine usually means just long enough 0:06:57.560 --> 0:07:00.680 to enjoy a cigarette. And because as they know what 0:07:00.800 --> 0:07:04.600 a pleasure it is to smoke a mild, good tasting cigarette, 0:07:04.960 --> 0:07:09.159 they're particular about the brand they choose. More doctors smoke 0:07:09.279 --> 0:07:13.240 camels than any other cigarette. Yes, you heard that right. 0:07:14.120 --> 0:07:17.560 Then in the mid nineteen sixties, a landmark event occurred, 0:07:17.880 --> 0:07:20.640 one that would prompt several states to raise their cigarette 0:07:20.680 --> 0:07:24.960 taxes even higher. The reason why was because the famous 0:07:24.960 --> 0:07:28.720 Surgeon General's Report of nineteen sixty four came out. This book, 0:07:28.800 --> 0:07:33.160 containing three seven carefully worded pages, as a federal government report. 0:07:33.880 --> 0:07:37.280 It was released at noon today, and it says, in 0:07:37.400 --> 0:07:40.400 view of the continuing and mounting evidence from many sources, 0:07:40.720 --> 0:07:43.200 it is the judgment of the committee that cigarette smoking 0:07:43.520 --> 0:07:48.400 contributes substantially to mortality from certain specific diseases and to 0:07:48.520 --> 0:07:52.840 the overall death rate. That is the basic conclusion. That 0:07:53.040 --> 0:07:56.760 was the study that linked tobacco consumption to all kinds 0:07:56.800 --> 0:08:00.320 of health problems. And when that study came out, then 0:08:00.400 --> 0:08:02.640 people began to say, hey, you know, we ought to 0:08:02.680 --> 0:08:05.960 try to discourage smoking. It's very bad for people, and 0:08:06.040 --> 0:08:07.880 how can we discourage it? Well, one way is to 0:08:07.960 --> 0:08:11.120 raise the price of it by taxes. The Surgeon General 0:08:11.200 --> 0:08:13.800 and states like New York had good intentions to warn 0:08:13.840 --> 0:08:16.320 people about the harms of smoking and to price them 0:08:16.360 --> 0:08:19.480 out of it, but the price difference between states grew 0:08:19.560 --> 0:08:23.000 as a result. It was that wider differential into prices 0:08:23.080 --> 0:08:26.520 that increase the profitability of smuggling. And that's when the 0:08:26.600 --> 0:08:28.960 organized crime figures got into it in a big way. 0:08:29.040 --> 0:08:32.400 And where did these smugglers see a unique opportunity. Nope, 0:08:32.720 --> 0:08:37.640 not in North Carolina reservations. The Indian reservations are not 0:08:37.800 --> 0:08:43.760 required by law to assess the state taxes, and they 0:08:44.080 --> 0:08:47.240 governed their own territories and they are not subject to 0:08:47.480 --> 0:08:50.520 the state laws. So a pack of cigarettes will show 0:08:50.600 --> 0:08:53.520 up on this Indian reservation in New York and no 0:08:53.679 --> 0:08:56.800 state tax has been paid on it. So if if 0:08:56.880 --> 0:09:01.360 Joe consumer walks onto the reservation, they and buy a 0:09:01.440 --> 0:09:04.320 pack of cigarettes without paying the New York state tax, 0:09:04.679 --> 0:09:08.199 and so a reservation becomes a giant costco for cigarettes. 0:09:09.000 --> 0:09:14.760 One reservation in New York is the Poospatuck Reservation on 0:09:14.880 --> 0:09:20.079 Long Island. It's one square mile of territory has two 0:09:20.160 --> 0:09:24.040 hundred and seventy residents, and when somebody was looking into 0:09:24.080 --> 0:09:26.720 this about ten years ago, they discovered that they had 0:09:26.840 --> 0:09:31.160 in one year imported one million packs of cigarettes. Overall, 0:09:31.240 --> 0:09:34.200 it's estimated that New York State loses nearly one billion 0:09:34.240 --> 0:09:37.920 dollars in tax revenue per year because of cigarette smuggling, 0:09:38.240 --> 0:09:41.079 and experts say that governments lose more than forty billion 0:09:41.080 --> 0:09:44.760 dollars worldwide. But what makes it even worse is where 0:09:44.760 --> 0:09:47.760 the money goes instead, there's a lot of profits to 0:09:47.760 --> 0:09:49.600 be had here. When there's a lot of profits to 0:09:49.640 --> 0:09:53.840 be had, illegally, um questionable characters will get involved in it. 0:09:54.200 --> 0:09:56.400 Remember the first bombing of the World Trade Center in 0:09:56.400 --> 0:10:00.199 New York, back the one where terrorists plays a rock 0:10:00.280 --> 0:10:03.040 bomb in the parking garage underneath the building. When the 0:10:03.080 --> 0:10:06.760 investigators went to the apartment of those uh, those men 0:10:06.800 --> 0:10:10.480 who had done that dastardly deed, they found phony cigarette 0:10:10.480 --> 0:10:13.760 stamps in there. They were apparently involved in cigarette smuggling. 0:10:14.200 --> 0:10:17.760 That's just one example. The Irish Republican Army back under 0:10:18.120 --> 0:10:23.520 hey Day was smuggling cigarettes. Saddam Hussein was a cigarette smuggler. 0:10:24.120 --> 0:10:26.560 In fact, his son who day was running the operation. 0:10:27.080 --> 0:10:29.679 It gets worse. They caught a guy up in New 0:10:29.760 --> 0:10:32.840 York a few years ago. He was smuggling cigarettes and 0:10:32.920 --> 0:10:37.000 using the proceeds to fund scholarships at terrorist training camps 0:10:37.000 --> 0:10:40.280 in Afghani Stands. In the year two thousand smugglers involved 0:10:40.280 --> 0:10:43.160 in another eight billion dollar ring were arrested here in 0:10:43.160 --> 0:10:46.880 North Carolina. Where were they sending their profits to? The 0:10:47.040 --> 0:10:54.720 terrorist group has Blah? So the government decides to tax cigarettes. 0:10:55.080 --> 0:10:58.840 Different states tax them at different levels, and ban smuggling. 0:10:58.880 --> 0:11:02.520 Becomes a multi billion dollar industry, one whose proceeds can 0:11:02.520 --> 0:11:06.360 be seen everywhere from reservations to terrorist training camps. But 0:11:06.440 --> 0:11:09.319 that's only part of the story. The reason that cigarettes 0:11:09.360 --> 0:11:12.280 first became so popular in America and such a prime 0:11:12.320 --> 0:11:15.679 target for taxation by different states, can be traced back 0:11:15.760 --> 0:11:19.240 to World War One. That's where this problem really starts 0:11:19.600 --> 0:11:33.439 and our story truly begins. Do you have an interesting 0:11:33.480 --> 0:11:37.360 tale about unintended consequences from history or your own life, 0:11:37.800 --> 0:11:40.480 Please share it with us by emailing flashback at Aussie 0:11:40.520 --> 0:11:59.240 dot com. That's flashback at o z y dot com. 0:11:59.280 --> 0:12:01.840 We all need a rake from the constant cycle to 0:12:01.960 --> 0:12:06.240 learn something new, to gain new perspectives. The Great Courses 0:12:06.240 --> 0:12:09.120 Plus streaming service is an excellent resource to expand our 0:12:09.160 --> 0:12:11.960 knowledge on a variety of subjects or pick up a 0:12:11.960 --> 0:12:14.960 new hobby. I've been enjoying the Great Courses Plus while 0:12:14.960 --> 0:12:19.080 researching this season of flashback lectures like Playball, the Rise 0:12:19.120 --> 0:12:22.439 of Baseball is America's Pastime, History of the Supreme Court, 0:12:22.720 --> 0:12:25.679 and Battlefield Europe have helped me connect the dots on 0:12:25.760 --> 0:12:29.400 several stories from history. Right now, they're giving our listeners 0:12:29.400 --> 0:12:32.959 a special, limited time offer a free month of unlimited 0:12:32.960 --> 0:12:36.240 access to their entire library. Sign up now through our 0:12:36.280 --> 0:12:39.480 special U r L go to the Great Courses Plus 0:12:39.520 --> 0:12:43.640 dot com slash as. That's the Great Courses Plus dot 0:12:43.640 --> 0:12:47.360 Com slash o z y the Great Courses Plus dot 0:12:47.400 --> 0:12:53.520 Com slash as. To listen to this episode in full, 0:12:53.640 --> 0:12:55.640 click the link in the show notes or search your 0:12:55.640 --> 0:13:01.200 podcast app for Flashback History's Unintended Consequences. New episodes dropping 0:13:01.240 --> 0:13:02.800 every Wednesday,