INTERSTATE CIGARETTE BOOTLEGGING HAS BECOME AN INCREASINGLY SERIOUS PROBLEM, PARTICULARLY IN THE NORTHEAST AND MIDWEST. SMUGGLING IS MADE PROFITABLE PRIMARILY BECAUSE OF DIFFERENCES IN STATE TAX RATES. CIGARETTES ARE BOUGHT IN LARGE VOLUME IN LOW-TAX STATES, TRANSPORTED ACROSS STATE LINES, AND SOLD AT A TREMENDOUS PROFIT IN HIGH-TAX STATES. THE MAJOR FINDINGS OF THIS REPORT INCLUDE: (1) THESE TAX-EVASION ACTIVITIES, CONSIDERED TO BE A SERIOUS PROBLEM IN 14 STATES, COST APPROXIMATELY $391 MILLION PER YEAR IN REVENUE LOSSES -- THE NATION'S NET REVENUE LOSS WAS $337 MILLION IN FISCAL YEAR 1975 (THE LOSS IN HIGH-TAX STATES IS GREATER THAN THE GAIN IN LOW-TAX STATES); (2) SMUGGLING IS DAMAGING TO THE LEGITIMATE TOBACCO INDUSTRY AND HAS COST MANY JOBS; (3) STATE EFFORTS TO CONTROL BOOTLEGGING ARE NOT EFFECTIVE BECAUSE OF THE INTERSTATE ASPECT OF THE PROBLEM AND THEIR LACK OF ADEQUATE RESOURCES; (4) BOOTLEGGING IS NOT A MINOR, VICTIMLESS OFFENSE -- IT IS A MAJOR SOURCE OF REVENUE FOR ORGANIZED CRIME, USED TO FINANCE OTHER ACTIVITIES; AND (5) THE ONLY WAY TO ELIMINATE BOOTLEGGING COMPLETELY IS TO ELIMINATE STATE TAX DIFFERENTIALS, AND THIS CANNOT BE ACCOMPLISHED WITHOUT STRONG FEDERAL INCENTIVES. RECOMMENDATIONS ARE PRESENTED, DEALING PRIMARILY WITH INCREASED LAW ENFORCEMENT EFFORTS. THE NATURE OF THE CRIME ITSELF IS DISCUSSED. THE FOUR TYPES OF CIGARETTE BOOTLEGGING ARE: CASUAL (TOURISTS BUYING FOR FRIENDS); ORGANIZED (THE TYPE WHICH CAUSES THE MOST CONCERN); MAIL-ORDER PURCHASE (NOW ON THE DECLINE BECAUSE OF STRICTER POSTAL LAWS); AND PURCHASE THROUGH TAX-FREE OUTLETS (INTERNATIONAL PORTS OF ENTRY, PX'S, AND INDIAN RESERVATIONS). ORGANIZED CRIME AND ITS IMPACT ON THE SMUGGLING PROGRAM IS EXAMINED. THE REPORT SUMMARIZES LEGISLATION AND AGENCIES ACTING TO REDUCE THE PROBLEM AND VARIOUS STATES' LAWS AND THEIR PENALTIES FOR CIGARETTE SMUGGLING. THE ACTUAL MECHANICS OF CIGARETTE TAX ADMINISTRATION ARE DISCUSSED, INCLUDING THE USE OF STAMPS AND DISTRIBUTOR DISCOUNTS. A PROPOSED FEDERAL INCENTIVE PLAN FOR EQUALIZING STATE TAX RATES IS OUTLINED; THERE WOULD BE A PHASED INCREASE IN THE FEDERAL EXCISE TAX ON CIGARETTES, WITH THE ADDITIONAL FUNDS USED TO GIVE REBATES TO STATES BASED ON THEIR CONSUMPTION. THERE ARE HOWEVER, MANY PROBLEMS WITH THIS KIND OF PROGRAM. APPENDIXES GIVE STATISTICS ON CIGARETTE TAXES, DESCRIBE THE STATISTICAL METHODOLOGY USED TO ESTIMATE THE REVENUE IMPACT OF BOOTLEGGING, AND PRESENT PROPOSED FEDERAL LEGISLATION WITH RESPECT TO BOOTLEGGING. TABLES AND GRAPHS ARE INCLUDED.