Has there been a change in US law or code that has allowed for the dramatic increase in unmarked police cars in recent years?

It depends on the state and sometimes even the city itself.  Most states allow unmarked cars for undercover and confidential investigation purposes, but the law varies on whether or not patrol cars used for traffic enforcement must be marked.  Some prohibit it, some allow it, some specify which departments are allowed unmarked cars and which are not (state vs. local, for example). Entrapment The officer would have to entice or persuade you to commit the crime for it to be entrapment.  Simply being in an unmarked vehicle observing you commit a crime is not considered enticing you or persuading you. If the officer was in an unmarked car, revving his engine, and encouraging you to race him, and you did, that could perhaps be considered entrapment.  But that never happens. Legality of Marked Cars Vary Here is an example of Texas law.  Other states vary. § 721.004. INSCRIPTION REQUIRED ON MUNICIPAL AND  COUNTY-OWNED MOTOR VEHICLES AND HEAVY EQUIPMENT.  (a) The office  having control of a motor vehicle or piece of heavy equipment owned  by a municipality or county shall have printed on each side of the  vehicle or equipment the name of the municipality or county,  followed by the title of the department or office having custody of  the vehicle or equipment. (b)  The inscription must be in a color sufficiently  different from the body of the vehicle or equipment so that the  lettering is plainly legible. (c)  The title of the department or office must be in letters  plainly legible at a distance of not less than 100 feet. Acts 1995, 74th Leg., ch. 165, § 1, eff. Sept. 1, 1995. Another state, Washington, allows state police to use unmarked cars for traffic patrol, but not local police. RCW 46.08.065 Publicly owned vehicles to be marked — Exceptions. (excerpt) (1) It is unlawful for any public officer having charge of any vehicle owned or controlled by any county, city, town, or public body in this state other than the state of Washington and used in public business to operate the same upon the public highways of this state unless and until there shall be displayed upon such automobile or other motor vehicle in letters of contrasting color not less than one and one-quarter inches in height in a conspicuous place on the right and left sides thereof, the name of such county, city, town, or other public body, together with the name of the department or office upon the business of which the said vehicle is used. This section shall not apply to vehicles of a sheriff's office, local police department, or any vehicles used by local peace officers under public authority for special undercover or confidential investigative purposes. Traffic control vehicles of the Washington state patrol may be exempted from the requirements of subsection (2) of this section at the discretion of the chief of the Washington state patrol. Getting Around the Restrictions In places where there are restrictions, the police usually get around the requirement by being creative in what constitutes "marked."  For example, for years, Houston has used white cars with white lettering on the sides to make the cars less obvious.  The white is reflective and is visible when looking directly at it, making it "sufficiently different" as required under the law. I heard of another city putting the police department's logo on the roof of the car, with no other indications that it was a police car. The way the law was written in that state meant that, technically, it was marked. So, basically, it depends on the state.

Thank your local drug dealers for the number of unmarked police cars. Most of the items taken in a drug raid get sold, but some cars get converted to unmarked cars. Basically, anything big enough to run a bigger generator and carry the extra radios can be used. The use of civil asset forfeiture since 1986 probably is why you are seeing more unmarked cars.