Organizing the Federal Enforcement Effort against Illicit Traffic in Tobacco Products: An Agenda for a New Administration
February 25, 2017
The illicit trade in tobacco products (ITTP) is substantial and growing. The federal government does not now have adequate capacity to control that traffic; other urgent priorities have compelled the responsible agency to substantially abandon enforcement efforts. Since the economic motivation for ITTP is high and unlikely to decrease under any currently probable scenario, the volume of ITTP is likely to grow. The resources required to bring any illicit market under control are roughly proportional to the size of the market. Thus, current neglect increases the future difficulty of the problem.
The incoming administration will have the opportunity to bring the illicit tobacco market under better control, thus contributing to the prevention of smoking-related harm while also reducing tax losses at the federal, state and local levels. Several options for improving the effectiveness of enforcement and compliance exist, some with minimal budgetary implications. However,some of them involve reassignment of responsibilities among federal agencies, in particular the transfer of criminal enforcement power over tobacco from the Justice Department’s Bureau of Alcohol, Tobacco, Firearms, and Explosives (BATFE), whose current policies lead it to neglect ITTP, to the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau (ATTTB). Such a reorganization would involve substantial administrative effort and might encounter substantial resistance.
The tobacco industry should offer all feasible support to the most effective and efficient option for improved control. The industry’s self-interest in supporting increased control of ITTP should be publicly acknowledged, balanced by the fact that reducing ITTP is also in the public interest for reasons of tax, health and criminal policy.
January 17, 2017
Illicit trade in tobacco products (ITTP) is big business in the United States and creates many harms including reduced tax revenues; damages to the economic interests of legitimate actors; funding for organized-crime and terrorist groups; negative effects of participation in illicit markets, such as violence and incarceration; and reduced effectiveness of smoking-reduction policies, leading to increased damage to health. To improve data availability for study in this area, we describe and make available a large, novel set of data from empty discarded pack (EDP) studies. In EDP studies, teams of researchers collect all cigarette packs discarded (either in trash receptacles or as litter) in the public spaces of selected neighborhoods. Packs are examined for the absence of local tax stamps, signs of non-authentic packaging or stamps, and other indications of potential tax evasion or counterfeit product. We describe the data and analyze the prevalence of ITTP. Data from 23 collections in 10 U.S. cities from 2010 to 2014 are available, yielding 106,500 observations (by far the largest dataset of its kind available for academic study). Each observation includes dozens of variables covering the brand, location to the ZIP code level, tax status, counterfeit status, and other information about the pack. There is significant evidence of tax avoidance (up to 74% of packs in New York City). In some markets there is also a significant amount of illicit trade (up to over half the market in New York City), which includes bootlegging, counterfeits, cigarettes produced for illicit-market sales, and cigarettes without any tax stamps. These data will be highly useful for research in illicit markets and organized crime.
December 9, 2016
Illicit trade in tobacco is a large and growing problem in the U.S., causing loss of tax revenue and damage to public health and safety. Decisions about enforcement against ITTP involve tradeoffs among competing objectives. Good policy design can improve the terms of those tradeoffs but not eliminate them. We examine questions both about the overall level of ITTP and its distribution across activities, individuals, and organizations, in particular whether and how to differentially target ITTP that involves violence or support for terrorism. Lessons from experience with markets for illicit drugs and insight from the theory regarding targeted enforcement are applied to developing effective strategies for enforcement. We show that targeted enforcement and focused deterrence are more efficient than unfocused enforcement. We discuss additional considerations, ranging from real-world complications left out of the simple models to examination of how insights from behavioral law and economics may reinforce or obviate a crime intervention based on a theory of deterrence designed for homo economicus.
January 19, 2016
Cigarettes are highly taxed in Europe to discourage tobacco use and to fund public-health measures to mitigate the harms from tobacco consumption. At higher prices (more precisely, at higher differentials between licit and black-market prices) consumers substitute more toward illicit cigarettes. Illicit retail trade in cigarettes (IRTC) includes counterfeiting and smuggling—either of legally purchased products, from lower-tax to higher-tax jurisdictions, or of entirely non-tax-paid cigarettes. The existing literature includes claims that taxes are not an important factor determining the scale of IRTC. We investigate these claims with data from 1999–2013 in the European Union. We find that while the simple correlation between licit cigarette prices and the market share of illicit cigarettes in consumption is negative, raising prices in any one country would, on average, lead to substantial increases in the expected illicit market share and volume in that country. A one euro increase in tax per pack in a country is expected to increase illicit market share by 5 to 12 percentage points and increase illicit cigarette sales by 25% to 120% of the average consumption. We also find that the role of prices in stimulating IRTC is, empirically, far more important than the role of corruption. The results are robust to a host of alternative specifications and sources of data.
July 13, 2015
Laws that prohibit, regulate, or tax cigarettes can generate illicit markets for tobacco products. Illicit markets both reduce the efficacy of policies intended to improve public health and create harms of their own. Enforcement can reduce evasion but creates additional harms, including incarceration and violence. There is strong evidence that more enforcement in illicit drug markets can spur violence. The presence of licit substitutes, such as electronic cigarettes, has the potential to greatly reduce the size of illicit markets.
We present a model demonstrating why enforcement can increase violence, show that states with higher tobacco taxes have larger illicit markets, and apply the findings to discussion of public policy toward a potential ban on menthol cigarettes. The social calculus involved in determining public policy toward tobacco cigarettes should include the harms from both consumption and control. We conclude by highlighting areas where more research is needed for effective policymaking.
Illicit Trade as a Countervailing Effect: What the FDA Would Have to Know to Evaluate Tobacco Regulations
February 25, 2015
The Family Smoking Prevention and Tobacco Control Act [P.L. 111–31] gives the US Food and Drug Administration (FDA) the authority to regulate tobacco products, including placing restrictions on product composition, sale, and distribution. A complete accounting of the costs and benefits of any tobacco regulation includes harms from possible illicit trade in tobacco products (ITTP): costs of enforcement, violence, incarceration, etc. Indeed, the law instructs the FDA to take into account the “countervailing effects” of regulation on public health, “such as the creation of a significant demand for contraband or other tobacco products that do not meet the requirements.” While the law’s narrow focus on public health may limit the scope of an inquiry by the FDA compared to a full benefit-cost analysis, aspects of ITTP such as violence and incarceration have substantial health impacts. Illicit markets in drugs such as cocaine, heroin, and methamphetamine, not to mention the grand experiment of alcohol Prohibition in the early twentieth century, illustrate the substantial risks of unwanted side effects of drug prohibition. But taxes, product limitations, access restrictions, and narrowly defined product bans constitute “lesser prohibitions,” and are subject to the same kind (if not degree) of risks. All tobacco policy-making should therefore consider ITTP. This article sets forth a research agenda for the FDA to consider in order to estimate the effects of contemplated tobacco-product regulation and ITTP. To carry out fully its legislative mandate, the FDA would have to determine the current size and impacts of ITTP, analyze how these may be expected to change under new regulations, and look for interdependencies among tobacco-product markets that may complicate single-product regulation. A more challenging element of the research agenda would be to develop a better theoretical groundwork for the prediction of the emergence, size, and side effects of illicit markets. We close with discussion of how the proposed research agenda may lead to insights into other policy areas as well.