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Tax Law

State Net Capitol Journal – April 7, 2014; Cigarette Taxes Spurring Costly Crime

Budget & Taxes

CIGARETTE TAXES SPURRING COSTLY CRIME: Forty-seven states, the District of Columbia and New York City have increased their tobacco taxes a total of 113 times since 2000, according to the Federation of Tax Administrators. All that activity has created wide disparities in the price of a pack of cigarettes, which in turn has fostered cigarette smuggling and other crimes that are depriving states of billions of dollars in tax revenues.

New York, which imposes a $4.35 per-pack tax — multiples of the amount charged in tobacco-producing states like Missouri (17 cents) and Virginia (30 cents) — has been particularly attractive to smugglers. Jeff Cohen, associate chief counsel for the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives in Washington, said criminals who buy 200 cases of cigarettes in North Carolina or South Carolina and sell them illegally in New York can clear as much as $500,000. The Midland, Michigan-based Mackinac Center for Public Policy estimated that nearly 57 percent of the cigarettes smoked in the Empire State in 2012 were smuggled.

According to the ATF, smuggling now costs federal and state governments $7 billion to $10 billion in tax revenues each year, up from $5 billion a few years ago. Cigarette smuggling is even cutting into the money states receive under the 1998 tobacco settlement with the nation's four largest tobacco companies because some states and cities have issued bonds against the payments they receive, which are based on cigarette shipments. The Massachusetts Attorney General's Office has estimated the state loses about $1,000 in settlement money for every million cigarettes that go untaxed.

Besides costing states revenue, the smuggling is also spurring other crimes, such as identity theft and credit card fraud, by which criminal rings are able to buy cigarettes in large quantities. Last year, 16 people from three states were indicted in connection with a ring that flooded New York City and Albany and Schenectady counties with over a million cartons of cigarettes imported illegally from Virginia. And similar schemes have also been used to help fund terrorist organizations in the past.

The loss of revenue and rise in crime has spurred legislative action in some states. Virginia and Maryland passed laws increasing the penalties on smuggling in the past year, and New Jersey and Rhode Island are considering doing the same.

"We are all-hands-on-deck as far as cigarette smuggling because it's no longer a mom-and-pop operation," said Maryland Comptroller Peter Franchot. "It's something that significant criminal entities are involved in, and it's a target-rich environment."

Since raising its tobacco tax by $1 last year to $3.51 per pack — making it the highest state levy behind New York's — Massachusetts has also been looking at what to do about illicit tobacco sales, with a state commission having recently estimated the tax hike will cost the state as much as $246 million in excise-tax revenue and $49 million in sales-tax revenue each year as a result of tax avoidance.

"That's real money, even in a budget of 30-plus billion dollars," said Amy Pitter, commissioner of Massachusetts' Department of Revenue, who led the state's Commission on Illegal Tobacco. "Everybody's dealing with this problem and thinking about what to do about it." (BLOOMBERG)

MD HOUSE PULLS FRANK UNDERWOOD ON 'HOUSE OF CARDS': A little over a month ago, the Hollywood studio behind the hit Netflix original series "House of Cards" threatened to pull the show out of Maryland, where its first two seasons were shot, unless the state provides it millions of dollars more in tax credits.

"In the event sufficient incentives do not become available, we will have to break down our stage, sets and offices and set up in another state," Charlie Goldstein, the senior vice president of Beverly Hills-based Media Rights Capital Studios, which owns the show's production company, wrote in a letter to Maryland Gov. Martin O'Malley (D).

Taking a page right out of the playbook of Frank Underwood, the show's ruthless main character, the Maryland House responded to Goldstein's letter by approving an amendment to the state budget authorizing the state to use its eminent domain power to seize the property of any production company that stops filming after receiving more than $10 million in tax credits from the state. At the moment that measure would only apply to the production company for "House of Cards."

"I literally thought: What is an appropriate Frank Underwood response to a threat like this?" said Del. C. William Frick (D). "Eminent domain really struck me as the most dramatic response."

But the production may not have too much to worry about. The state's Senate isn't likely to agree to the property grab, after already having passed a measure increasing the amount of film production tax credits available in the coming year from $7.5 million to $18.5 million by a vote of 45 to 1.

And even Frick admitted he's a big fan of the show.

"It's a terrific show. I love it. You probably love it," he said on the House floor.

But he added that the threat from Media Rights Capital just "went a little far." (BLOOMBERG, WASHINGTON POST, STATE NET)

BUDGETS IN BRIEF: With a $1 billion surplus projected for his state by June 2015, WISCONSIN Gov. Scott Walker (R) signed a $541 million income and property tax cut bill last month. The action marked the third time the state has lowered taxes in less than a year (MILWAUKEE JOURNAL SENTINEL). • NEBRASKA Gov. Dave Heineman (R) signed property, sales and income tax cut measures representing $412 million in total reductions over five years. The governor also called for more tax relief in the future (OMAHA WORLD-HERALD). • To help plug his state's current budget gap, NEW JERSEY Gov. Chris Christie (R) altered the funding formula for calculating the state's pension contribution. Fitch Ratings downgraded the state's credit outlook from "stable" to "negative" largely due to the change, which will reduce the state's pension payments by $900 million over the next four years, adding to its existing $51 billion unfunded pension liability (NJSPOTLIGHT.COM, BLOOMBERG). • A pair of Republican COLORADO lawmakers have proposed a ballot initiative that would prevent municipalities in the state that ban oil and gas drilling from receiving a share of state severance tax revenues (DENVER POST). • The ARKANSAS General Assembly voted to override Gov. Mike Beebe's (D) veto of a portion of a budget bill exempting sand used by oil and gas drillers from the state sales tax (ARKANSAS NEWS BUREAU, STATE NET). • The NEW YORK Legislature approved a $138 billion state budget for the fiscal year that began April 1 that includes $1.5 billion in property tax relief (ALBANY TIMES UNION). • TENNESSEE officials say a growing hole in the state budget may be due to companies taking advantage of tax loopholes. Despite an improving economy and a surge in the stock market, the state's franchise and excise taxes — the third-largest source of revenue in the state behind federal aid and sales taxes — were short of projections by 20 percent, or over $200 million (TENNESSEAN [NASHVILLE]). • ARIZONA has hit a three-way budget impasse, with both the state House and Gov. Jan Brewer (R) refusing to support the latest version of the

- Compiled by KOREY CLARK

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