Speaker 1: Authorities in North Carolina first started to get suspicious in
Speaker 1: that's when they noticed two odd things near the city
Speaker 1: of Fayetteville. First, there was an unusually large number of
Speaker 1: cigarettes being sold in the area, far more than could
Speaker 1: be explained by local demand. The second, police were stopping
Speaker 1: a number of vehicles along the local interstate highway that
Speaker 1: were carrying cash, lots of cash. The investigation led authorities
Speaker 1: to a plain, gray brick building. This is where investigators
Speaker 1: say it all started. This business behind me here is
Speaker 1: called free Co is listed on Google as a candy business.
Speaker 1: But authorities say what was coming out of here wasn't candy.
Speaker 1: It certainly wasn't. What authorities unearthened Fayetteville last year was
Speaker 1: one of the largest cigarettes smuggling rings of its kind.
Speaker 1: Authorities seized about eight hundred and forty dollars in cash,
Speaker 1: eleven vehicles and four hundred thousand cartons of cigarettes, and
Speaker 1: five guns. More than two dozen people were arrested in
Speaker 1: connection with the twelve million dollar operation. So why is
Speaker 1: there so much money in moving cigarettes across state borders?
Speaker 1: Why would someone in New York even want to buy
Speaker 1: the exact same cigarettes from North Carolina that they can
Speaker 1: buy at home. And most importantly, how did we get
Speaker 1: in this mess in the first place. The answer, as
Speaker 1: we shall see, involves a potent combination of taxes, war,
Speaker 1: and big business. But most of all, the rampant cigarettes
Speaker 1: smuggling in America today is the unintended product of good intentions,
Speaker 1: And if you're looking for someone to blame, you could
Speaker 1: accuse everyone from the smuggler, to the tobacco industry to
Speaker 1: the tax collector. But before you point any fingers, let
Speaker 1: me first tell you a little story about the y
Speaker 1: m c A. I'm Sean Braswell. Welcome to Flashback, a
Speaker 1: history podcast from Aussie. This season, we are diving deep
Speaker 1: into some of the most remarkable and unsettling examples of
Speaker 1: unintended consequences from history. In this episode, we'll see how
Speaker 1: an enormous active virtue by the y m c A
Speaker 1: more than a century ago, continues to lead to all
Speaker 1: manner of vice, including that cigarette smuggling operation in Fayetteville,
Speaker 1: North Carolina. The reason that criminal operations like the one
Speaker 1: in Fayetteville exists is pretty simple. The federal government imposes
Speaker 1: attacks on cigarettes. That's a dollar and one cent per pack.
Speaker 1: Thomas E. Hall is an emeritus economics professor at the
Speaker 1: University of Miami, Ohio and the author of Aftermath, The
Speaker 1: Unintended Consequences of Public Policies. But it doesn't matter where
Speaker 1: you buy them in the United States, you're gonna pay
Speaker 1: the federal tax. What differs are these state taxes and
Speaker 1: the state taxes on cigarettes very a great deal. Some
Speaker 1: states are low tax states, some like New York, are not.
Speaker 1: The state of New York adds attacks of four dollars
Speaker 1: and thirty five cent to a pack of cigarettes. Then
Speaker 1: the City of New York also taxes, and they had
Speaker 1: an additional dollar and fifty cents on to a pack
Speaker 1: of cigarettes. So that means if you bought a pack
Speaker 1: of cigarettes in New York City, uh, there's five dollars
Speaker 1: and eighty five cents of taxes on a pack, or
Speaker 1: close to sixty dollars of tax per carton. North Carolina,
Speaker 1: on the other hand, collect only about five dollars in
Speaker 1: tax per carton. I may be a history buff, but
Speaker 1: even I can do that math. Smugglers can make up
Speaker 1: to fifty five dollars per carton selling North Carolina cigarettes
Speaker 1: in New York. And if each truck of black market
Speaker 1: cigarettes carries about fifty thousand cartons. Then you're talking about
Speaker 1: two point seven million dollars in potential profit per truck.
Speaker 1: Two point seven million dollars per truck. So you can
Speaker 1: see what's going on here. You have this this profit opportunity.
Speaker 1: To say the least, there's more than just an opportunity.
Speaker 1: There's an easily moved commodity. Cigarettes are a product that
Speaker 1: are very easy to move a round because they're they're light, um,
Speaker 1: they're small, and they're durable. This sort of tax arbitrage
Speaker 1: opportunity can play out even within a radius of a
Speaker 1: few miles. I live in Cincinnati, Ohio, and Cincinnati, Ohio
Speaker 1: is a river town. It's on the Ohio River, and
Speaker 1: across the river is the state of Kentucky. Now, Kentucky
Speaker 1: is a tobacco grower. There's a big crop down there. So,
Speaker 1: needless to say, the Kentucky state legislature has an interest
Speaker 1: in keeping its tobacco farmers happy. Now, that means that
Speaker 1: the taxes on tobacco are not as high in Kentucky
Speaker 1: as they are aren't Ohio. In fact, it's a difference
Speaker 1: about fifty cents a pack, which means if you're a
Speaker 1: smoker in Cincinnati, all you have to do to save
Speaker 1: fifty cents for a pack of cigarettes or five dollars
Speaker 1: for a carton is drive across the John A. Robling
Speaker 1: suspension Bridge to Kentucky. And when you cross one of
Speaker 1: those bridges, you'll find one liquor and tobacco store after
Speaker 1: another right there by the river. But the real opportunity
Speaker 1: for smugglers is moving cigarettes from a low tax state
Speaker 1: like North Carolina, where I live, and a high tax
Speaker 1: one like New York. I asked Hall if I should
Speaker 1: be getting in on the action. If you could keep
Speaker 1: the mafia off your back, you can make one helpful
Speaker 1: lot of money moving cigarettes up to New York. It's
Speaker 1: a dangerous business, though, I guess I'll pass. So how
Speaker 1: did we get in this bizarre tax situation? In America?
Speaker 1: The US first started taxing tobacco to help raise money
Speaker 1: for the Civil War, and they continued to do so
Speaker 1: after the war was over. Thomas Holligan Essentially, what the
Speaker 1: government discovered was that this was a great revenue raiser.
Speaker 1: By nineteen thirty, tobacco taxes were generating about fifteen percent
Speaker 1: of the federal government's tax collections four hundred and fifty
Speaker 1: million dollars of annual revenue for about seven billion dollars
Speaker 1: worth today, and soon states wanted in on the action
Speaker 1: to The first state cigarette taxes popped up in nearly
Speaker 1: nineteen twenties, and the reason why they did was because
Speaker 1: we had a fairly bad recession from nineteen we needed
Speaker 1: twenty one and during economic recessions, revenue to governments goes down.
Speaker 1: The states were trying to close their budget upsets, so
Speaker 1: they decided to start taxing cigarettes. In nineteen Iowa became
Speaker 1: the first state to enact the state level cigarette tax.
Speaker 1: By the nineteen thirties, more than thirty other states had followed.
Speaker 1: The original cigarette taxes were pretty low. We're just talking
Speaker 1: about a few pennies on the pack. But that's all
Speaker 1: it took to get the smuggling started, because once you
Speaker 1: impost higher taxes in one area than another, then you
Speaker 1: have this opera economic consent of to buy the cigarettes
Speaker 1: in the low cost area and try to sell them
Speaker 1: into high cost area. Still, there wasn't a whole lot
Speaker 1: of money in smuggling cigarettes yet, and most smugglers were
Speaker 1: still small time criminals. Meanwhile, the popularity of cigarettes in
Speaker 1: America continued to soar even doctors recommended them. Time out
Speaker 1: for many men of medicine usually means just long enough
Speaker 1: to enjoy a cigarette. And because as they know what
Speaker 1: a pleasure it is to smoke a mild, good tasting cigarette,
Speaker 1: they're particular about the brand they choose. More doctors smoke
Speaker 1: camels than any other cigarette. Yes, you heard that right.
Speaker 1: Then in the mid nineteen sixties, a landmark event occurred,
Speaker 1: one that would prompt several states to raise their cigarette
Speaker 1: taxes even higher. The reason why was because the famous
Speaker 1: Surgeon General's Report of nineteen sixty four came out. This book,
Speaker 1: containing three seven carefully worded pages, as a federal government report.
Speaker 1: It was released at noon today, and it says, in
Speaker 1: view of the continuing and mounting evidence from many sources,
Speaker 1: it is the judgment of the committee that cigarette smoking
Speaker 1: contributes substantially to mortality from certain specific diseases and to
Speaker 1: the overall death rate. That is the basic conclusion. That
Speaker 1: was the study that linked tobacco consumption to all kinds
Speaker 1: of health problems. And when that study came out, then
Speaker 1: people began to say, hey, you know, we ought to
Speaker 1: try to discourage smoking. It's very bad for people, and
Speaker 1: how can we discourage it? Well, one way is to
Speaker 1: raise the price of it by taxes. The Surgeon General
Speaker 1: and states like New York had good intentions to warn
Speaker 1: people about the harms of smoking and to price them
Speaker 1: out of it, but the price difference between states grew
Speaker 1: as a result. It was that wider differential into prices
Speaker 1: that increase the profitability of smuggling. And that's when the
Speaker 1: organized crime figures got into it in a big way.
Speaker 1: And where did these smugglers see a unique opportunity. Nope,
Speaker 1: not in North Carolina reservations. The Indian reservations are not
Speaker 1: required by law to assess the state taxes, and they
Speaker 1: governed their own territories and they are not subject to
Speaker 1: the state laws. So a pack of cigarettes will show
Speaker 1: up on this Indian reservation in New York and no
Speaker 1: state tax has been paid on it. So if if
Speaker 1: Joe consumer walks onto the reservation, they and buy a
Speaker 1: pack of cigarettes without paying the New York state tax,
Speaker 1: and so a reservation becomes a giant costco for cigarettes.
Speaker 1: One reservation in New York is the Poospatuck Reservation on
Speaker 1: Long Island. It's one square mile of territory has two
Speaker 1: hundred and seventy residents, and when somebody was looking into
Speaker 1: this about ten years ago, they discovered that they had
Speaker 1: in one year imported one million packs of cigarettes. Overall,
Speaker 1: it's estimated that New York State loses nearly one billion
Speaker 1: dollars in tax revenue per year because of cigarette smuggling,
Speaker 1: and experts say that governments lose more than forty billion
Speaker 1: dollars worldwide. But what makes it even worse is where
Speaker 1: the money goes instead, there's a lot of profits to
Speaker 1: be had here. When there's a lot of profits to
Speaker 1: be had, illegally, um questionable characters will get involved in it.
Speaker 1: Remember the first bombing of the World Trade Center in
Speaker 1: New York, back the one where terrorists plays a rock
Speaker 1: bomb in the parking garage underneath the building. When the
Speaker 1: investigators went to the apartment of those uh, those men
Speaker 1: who had done that dastardly deed, they found phony cigarette
Speaker 1: stamps in there. They were apparently involved in cigarette smuggling.
Speaker 1: That's just one example. The Irish Republican Army back under
Speaker 1: hey Day was smuggling cigarettes. Saddam Hussein was a cigarette smuggler.
Speaker 1: In fact, his son who day was running the operation.
Speaker 1: It gets worse. They caught a guy up in New
Speaker 1: York a few years ago. He was smuggling cigarettes and
Speaker 1: using the proceeds to fund scholarships at terrorist training camps
Speaker 1: in Afghani Stands. In the year two thousand smugglers involved
Speaker 1: in another eight billion dollar ring were arrested here in
Speaker 1: North Carolina. Where were they sending their profits to? The
Speaker 1: terrorist group has Blah? So the government decides to tax cigarettes.
Speaker 1: Different states tax them at different levels, and ban smuggling.
Speaker 1: Becomes a multi billion dollar industry, one whose proceeds can
Speaker 1: be seen everywhere from reservations to terrorist training camps. But
Speaker 1: that's only part of the story. The reason that cigarettes
Speaker 1: first became so popular in America and such a prime
Speaker 1: target for taxation by different states, can be traced back
Speaker 1: to World War One. That's where this problem really starts
Speaker 1: and our story truly begins. Do you have an interesting
Speaker 1: tale about unintended consequences from history or your own life,
Speaker 1: Please share it with us by emailing flashback at Aussie
Speaker 1: dot com. That's flashback at o z y dot com.
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