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Cigarette smuggling costs states billions

Many state governments are struggling to make ends meet, and many are laying off cops and teachers.

CBS News correspondent Bob Orr reports that, as a result, some states are losing billions of dollars to smugglers in an illegal trade that can be more profitable than drug dealing.

On Interstate 95, at the Virginia-Maryland border, CBS News observed police closing in on a suspected smuggler. He was not running drugs, but something even more profitable.

Inside the car police find 12 cases of cigarettes - 3,600 packs - bought in Virginia, and likely destined to be resold illegally in New York.

"There are people who make a living out of smuggling cigarettes, and by that I mean van-loads and truck-loads of cigarettes, and the amount of money is phenomenal. It's tens of thousands of dollars in any particular run," said Jeff Kelly, who is in charge of the anti-smuggling efforts in Maryland.

Here's how the smugglers are cashing in: They buy carloads of cigarettes in low tax states like North Carolina and Virginia for about $4 per pack, then sell them in high-tax states like New York, for up to $12 dollars per pack.

Since the bootleggers aren't paying the high New York taxes, they pocket easy money selling their cigarettes on the streets, or in Mom and Pop convenience stores.

One regular carload could bring $30,000 in illegal profits.

"This is becoming the new organized crime, the new Prohibition," said ATF agent Rich Marianos. "Every day we see more and more criminal organizations utilizing illegal cigarettes to facilitate their operations."

It's those criminal organizations and violent gangs the ATF is targeting.

In one sting, members of a Philadelphia street crew traded a bundle of marijuana for cartons of cigarettes to undercover agents posing as dealers.

After gaining their trust, the agents helped the gang "plot" an armed robbery of a competing smuggler. The gang members were all arrested, convicted, and sentenced to long prison terms.

"Many occasions we'll have a narcotics dealer bring us firearms and narcotics to trade for contraband cigarettes or untaxed cigarettes. It's extremely lucrative," said Marianos.

The U.S. Justice Department estimates state and local governments are losing $5 billion per year from untaxed cigarettes being sold on the black market. Police know they're only catching a fraction of the smugglers.

Weak laws are big part of the problem. Unless guns or drugs are involved, smuggling penalties are light. The two men arrested in the stop observed by CBS News, if convicted, face a maximum of two years in prison.

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