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