The illicit cigarette trade is evolving in Virginia as criminals obtain business licenses and open fronts for trafficking in order to move millions of dollars in untaxed cigarettes out of Virginia for illegal resale in the Northeast.

Competition among illegal dealers is spawning a wide array of other crimes, ranging from credit card fraud to armed robberies to financing terrorism.

Now, the growing trafficking trade has fueled a political debate over how to address the problem without hurting the tobacco industry, which employs thousands in Virginia and has a statewide economic impact of more than $1 billion annually.

Virginia’s cigarette tax, at 30 cents per pack, remains the second-lowest in the country. New York, the destination for much of Virginia’s cigarette smuggling trade, has the nation’s highest at $4.35 per pack — and New York City adds an extra $1.50 per pack. The national average is $1.54 per pack.

“Six years ago, I put in a bill to raise the cigarette tax to just half the national average, and that bill didn’t even get out of the Senate committee,” said Sen. Janet D. Howell, D-Fairfax, a ranking Democrat and a member of the Virginia Crime Commission, which has studied the trafficking issue.

“If we were to raise Virginia’s tax to the national average, that would totally discourage it,” she said.

But for the past 10 years Virginia lawmakers have held firm in extinguishing any attempt to raise the cigarette tax even modestly. Legislators cite various reasons, including a philosophic aversion to tax increases, tobacco industry influence and a belief by some that New York’s high taxes created the problem.

Lawmakers also have declined to close a loophole that allows shell businesses of cigarette smugglers to operate out of storage lockers and pose as in-state retailers.

While hard figures are hard to come by, the smuggling trade is having an effect on Virginia’s bottom line.

The Mackinac Center for Public Policy found that in 2013, the most recent year for which figures are available, Virginia — with a 30-cents-a-pack excise tax — gained more than $31 million in revenue from cigarettes sales that would not have been made here were they not purchased with the intent to illegally send them to another state.

The excise tax revenue gain, however, is offset by lost Virginia sales taxes. Many traffickers buy cigarettes in Virginia from big-box stores and other sources without paying the 5.3 percent state sales tax, promising the tax will be collected at the retail level but instead illegally sending them out of state.

Just one recently sentenced cigarette trafficker cost Virginia more than $1 million in lost sales taxes on 450,000 cartons of cigarettes purchased at Virginia Costco stores in a 2½-year period ending in January 2014.

Historic ties

Tobacco has played such a large part in Virginia’s history and politics that many lawmakers and visitors to Virginia’s historic Greek-revival Capitol in Richmond believe the series of gold leaves ringing the skylight of the Senate chamber are tobacco leaves.

In fact, they are acanthus leaves, but the impression that they represent tobacco underscores the crucial role the cash crop played in the establishment of English settlements that anchored a colony and helped found a nation.

Thomas Jefferson was a tobacco farmer, as was George Washington.

More than 400 years after John Rolfe introduced tobacco to Virginia colonists as a commercial crop, tobacco and the real gold that it generates remain potent influences in the life of the commonwealth and its politics.

But in recent years the harmful health effects of smoking have become well-documented and litigated. The use of tobacco in the form of cigarettes has declined in the U.S., and the battles to preserve the industry and further regulate it have intensified in the halls of power, testing old allegiances against a backdrop of societal changes and new challenges.

Seeking to discourage smoking and reduce its associated health costs, many states have passed steep taxes on the per-pack purchase of cigarettes and other tobacco products. Virginia, meanwhile, has kept its tax rock-bottom.

Virginia lawmakers last approved a cigarette tax increase in 2004, voting to bump it in two steps — from 2.5 to 20 cents per pack that year and to 30 cents per pack effective in July 2005.

Missouri has the lowest state cigarette tax at 17 cents per pack. In the major tobacco-producing states, the average tax is 48.5 cents per pack.

The evolving trafficking problem

The huge disparity in cigarette taxes has given rise to an increase in the trafficking of contraband cigarettes, primarily between Virginia and New York. Illicit dealers buy cigarettes in bulk here and peddle them in New York for double their money.

Ken Mosley with the federal Bureau of Alcohol, Tobacco, Firearms and Explosives in Richmond has said cigarette trafficking is “a huge organized crime problem in this state.”

Howell, the Fairfax senator, said: “As long as we have this big discrepancy between us and other states, especially New York, we will continue to have the trafficking problem. And as long as we have the trafficking, we’re bringing in very undesirable characters with organized crime and terrorists, so we are going to have to come to grips with our tax rate.”

She attributed the failure to get an increase in the cigarette tax rate to the influence of the local tobacco industry and the jobs that it generates.

The state alone received nearly $170 million in taxes on cigarettes and other tobacco products in fiscal year 2013 and roughly $162 million in fiscal year 2014, according to the Virginia Department of Taxation.

Richmond, the state capital and home to the General Assembly and governor’s office, is also home to Altria, the nation’s largest tobacco company, which has its only U.S. manufacturing plant in the commonwealth and employs more than 4,000 Virginians at six facilities in the region.

Since 1997 the company has donated nearly $5 million to political candidates — more than any other corporation or trade group except Dominion, the powerful utility company, which has donated more than $9.3 million, according to the Virginia Public Access Project, a nonpartisan tracker of money in state politics.

“The whole reason Virginia existed is because of tobacco,” said former Del. Ward Armstrong, D-Henry, a former minority leader in the House of Delegates who spent 20 years in the halls of power, during which he received more than $35,000 in donations from Altria and its subsidiaries.

“It was clearly the financial backbone of the state, not for years or decades, but for centuries. And Philip Morris was the personification of that. Of course, money is power in politics. … You didn’t cross tobacco.”

Whose problem is it?

Some other current and former lawmakers and industry officials have serious doubts that a bump in a per-pack tax would have a significant impact on trafficking. They said that would likely require an increase so high that it would be politically untenable.

“I’m not convinced it’s a Virginia problem,’ said Del. John M. O’Bannon III, R-Henrico, whose district includes Altria’s corporate headquarters.

“I think it’s an enforcement problem and, to some degree, a New York problem. We raised our tax a few years ago. ... So I don’t know that that’s likely to solve the problem.”

O’Bannon said the reason to keep the tax low is part of a “historical argument. We have produced the product and they are a business, and they are part of our culture, our heritage. So we have chosen to do that because that’s what the majority of folks in the General Assembly feel.”

O’Bannon, a physician, said the state can work hard to encourage people not to smoke and noted his involvement with the Foundation for Healthy Youth. But smoking, he said, “is an adult decision and they are a legal business in Virginia. And they do support Virginia with their taxes, so I think that’s the balance.”

One Capitol Square veteran said that, given Altria’s presence, Virginia lawmakers raising the cigarette tax would be like Michigan passing a tax against cars made in Detroit.

The support from cigarette tax money does not simply extend to the state coffers. Virginia is one of only a handful of states that allow local governments to impose their own tariffs on tobacco. More than 100 local governments in Virginia have some form of additional taxation on cigarettes ranging from 10 cents to up to an additional $1 a pack, according to the Virginia State Crime Commission.

The disparity in cigarette pricing within Virginia can be an incentive for trafficking within state borders, industry officials say. They argue that the trafficking problem isn’t because Virginia’s tax is too low, it’s that taxes in other states are too high.

“The driver is the high excise rate,” said Altria spokesman David Sutton.

The ‘T-word’

The idea of raising taxes has found little support among state lawmakers, in particular among House and Senate Republicans, who control both chambers of the legislature. All 140 seats in the General Assembly are up for election this year.

Current and former officials say simply the concept of raising a tax, any tax, is the greater obstacle to increasing the cigarette levy in today’s political climate — even more than the influence of the tobacco lobby or its position that a hike in Virginia would not solve the problem.

“Altria is still a player, but no one in a conservative House caucus wants to raise any tax,” Armstrong said. “No one wants a primary challenger, and they don’t want to be explaining ‘Why I raised taxes.’ Even if it’s a sin tax, it’s the T-word.”

Revenues from the state’s taxes on cigarettes and other tobacco products help finance the Virginia Health Care Fund, which directs money for Medicaid payments, disease prevention and community health services.

This year, Del. K. Rob Krupicka Jr., D-Alexandria, proposed House Bill 1590, which would have increased the cigarette tax from 30 cents per pack to $2 and diverted the additional revenue to education. It never made it out of the House Finance subcommittee.

While trafficking is a concern, the cigarette tax issue does not seem to be on the front burner for Gov. Terry McAuliffe.

Like his gubernatorial predecessors, McAuliffe has received more campaign donations from Altria — $118,167 — than any state lawmaker with the exception of longtime Sen. Walter A. Stosch, R-Henrico ($119,089). His Senate district includes Altria headquarters.

“The governor is committed to work with the General Assembly and the crime commission to curtail cigarette trafficking in Virginia,” said McAuliffe spokesman Brian Coy.

“If the General Assembly passes an increase in the tax as a response to this issue, he will evaluate it carefully at that time.”

The smugglers’ loophole

Even a bill aimed at cigarette trafficking that had tobacco industry support failed to advance out of House committee this year.

Sen. Bryce E. Reeves, R-Spotsylvania, proposed Senate Bill 1230, a measure supported by the crime commission. It sought to close a loophole that allows shell businesses of smugglers to operate out of storage lockers and pose as in-state retailers.

The bill cleared the Virginia Senate but was snuffed out in the House General Laws Committee under pressure from the powerful Retail Merchants Association, which objected to the cost of licensing and what it said would be additional responsibility and risk placed on merchants.

RMA spokeswoman Mary Huffard Kegley said the group “does not support industry-specific taxes.”

“There’s so much that retailers already do,” she said. “Adding one more license, one fee, one more tax for them to collect and remit causes a real problem.”

She said the group “wants to do all we can” to help with trafficking and is open to further discussion on the issue.

“The retail merchants freaked out,” said Del. David B. Albo, R-Fairfax, a member of the General Laws panel. “They didn’t want to be charged, and they didn’t want to be burdened to keep track of sales of legal goods.”

Albo said the bill had other issues that would require more work, and advocates on both sides acknowledged that a provision that would have put enforcement of the new licensing under the authority of the state Alcohol Beverage Control board was problematic, given recent controversies involving the agency.

Reeves, a former police officer who now works in insurance, said he did not see the bill, or a vote for it, as supporting a tax increase, nor did he intend to burden retailers.

“I’m the last person who wants to do that, but I do want to stop stuff from happening and catch the bad guys,” he said.

Reeves said he would continue to work on the measure through the crime commission. He said similar regulations are in place in 36 states.

“The problem is not going away. If anything, it’s amplified,” he said.

“There are some folks that would have liked to vote for it, but it’s a re-election year and they were under some enormous pressure,” Reeves continued. “Everybody has retail merchants around them.”

Reeves said he does not accept the argument that trafficking is simply New York’s problem and not Virginia’s as well.

“It is in my backyard — you accept responsibility,” he said. “It’s our problem.”

The health issue

Almost lost in the discussion over the politics of the cigarette tax and the most effective way to combat trafficking is the nature of the product in question, which is linked to more than 480,000 deaths a year.

Such groups as the American Heart Association and the Campaign for Tobacco Free Kids support moves to significantly increase Virginia’s cigarette tax. They believe a hike would not only discourage trafficking but also reduce the number of smokers and subsequently curb the number of health-related illnesses that smoking causes.

“When you have a product that is such a direct and continuing threat to public health, our public policy should be directed to curbing consumption,” said Dennis Henigan of the Campaign for Tobacco Free Kids.

“The tobacco industry is powerful in Virginia, and tobacco is a key part of the state’s history,” Henigan said. “But ultimately it comes down to what is good for the average Virginian ... and there has been a huge shift in the cultural perceptions of the product and the attitudes of Virginians are changed dramatically.”

For now, lawmakers on both sides of the issue do not see a change in the cigarette tax coming anytime soon.

“I’ve caught some heat from my peers, some lung doctors, because of the position I’ve had historically,” said O’Bannon, the Henrico delegate and physician.

“But I think, as far as the issue with New York, that the right way to go is to do the enforcement side rather than raise the tax here. They’d just go to Kentucky rather than Virginia.”

Howell, the Democratic senator from Fairfax, who favors an increase, also is not optimistic.

“The chance is about zero,” she said during a break outside the Senate chamber during the legislature’s recent reconvened session to take up the governor’s vetoes and proposed amendments to legislation.

She suggested that ultimately the solution to trafficking could be a hike in the nationwide excise tax, currently at $1.01 per pack.

“What we’re doing now is we’re changing the code, changing the penalties, putting our fingers in the dike as each problem comes up, but we’re not getting to the root cause,” she continued. Then she gestured toward the Senate chamber.

“The tobacco industry is persuasive with my colleagues,” she said.

“It’s the tradition of Virginia. That’s what you’re up against.”




jnolan@timesdispatch.com

(804) 649-6061

Twitter: @RTDNolan

Staff writer Frank Green contributed to this report.

Recommended for you

Commenting is limited to Times-Dispatch subscribers. To sign up, click here.
If you’re already a subscriber and need to activate your access or log in, click here.

Load comments

You must be a full digital subscriber to read this article You must be a digital subscriber to view this article.