The proposed tax hike on cigarettes in the state budget would create a “black market gold mine” for smugglers and force New York smokers to pay the highest taxes in the nation, experts warn.
Facing a $5 billion budget gap, state lawmakers see doubling the state’s cigarette tax, to $3 a pack, as a way to help weather a difficult economic period. The $3 tax would be the highest of any state in America, $0.42 higher than New Jersey, which currently holds the record, and $2.93 higher than South Carolina’s lowest-in-the-nation $0.07 tax. Smokers in New York City, which adds a $1.50 surcharge on cigarettes, would pay $4.50 a pack in taxes.
The tax hike, the first in six years, is expected to earn the state between $200 million and $300 million. A pack of premium cigarettes in New York City now costs $7 or $8; prices would rise to above $9. Opponents of the tax increase argue that higher prices would drive smokers to seek ways to evade the law and purchase cheaper cigarettes from smugglers or in neighboring states, blunting potential revenue gains for the state. “It’s a black market gold mine,” a senior fellow at the Manhattan Institute, E.J. McMahon, said of the proposed tax. “You have to invest resources in scores of attorneys, cops, and auditors, who are all part of the tax enforcement you need.”
“By raising cigarette taxes you help fund the mob,” the president of Americans for Tax Reform, Grover Norquist, said. “Cigarettes are easier than liquor, as they’re lighter and smaller per container. It leads to smuggling and smuggling is done best by organized crime.”
Mr. Norquist said New York’s proximity to states with lower taxes would lead smokers to cross the border to buy cigarettes, reducing tax revenue below state projections.
New York has seen significant increases in its cigarette tax rates before. In 2002, New York City’s cigarette tax increased to $1.50 from $0.08, as part of an initiative by Mayor Bloomberg to encourage smokers to give up the habit. Although the taxes produced an increase in city and state revenue, some smokers took illegal measures to avoid paying the new tax, costing taxpayers tens of millions of dollars.
A 2007 report by the Independent Budget Office, a nonpartisan city agency that analyzes the city’s finances, found that 27% of city smokers and 34% of upstate smokers sometimes bought “under-taxed” cigarettes in 2006. These smokers avoided the tax by buying cigarettes from other states, ordering cigarettes over the Internet, and purchasing cigarettes at Indian reservations. The city lost an estimated $40 million in tax revenue as a result of cigarette tax evasion in 2006, according to the report.
“It encourages people not to be ripped off,” the founder of Citizens Lobbying Against Smoker Harassment, Audrey Silk, said of cigarette taxes. “Any consumer who’s so abused will look for ways to avoid it, making outlaws out of normally law-abiding citizens.”
Supporters of the cigarette tax note that despite lost revenue to smuggling and other tax evasion methods, net tax revenue has increased in every state that has raised prices, though not always as much as predicted. In the city’s case, tax revenue from cigarettes rose to $160 million from $30 million between 2002 and 2003, even after taking into account an agreement with the state that sent 46% of the city’s cigarette tax revenue to Albany.
“Despite any smuggling or tax evasion going on, the state or local governments still make a big chunk of money from increasing their tax rates on cigarettes,” the director for policy research at Campaign for Tobacco-Free Kids, Eric Lindblom, said. “That’s not to say there isn’t any smuggling or tax evasion. There is.”
Mr. Lindblom said certain methods reduce tax evasion. Governor Spitzer, for example, reached agreements with wholesalers, credit card companies, and postal services during his tenure as attorney general to restrict sales to illegal online cigarette retailers. Sales at Indian reservations pose a greater problem in New York State, Mr. Lindblom added, but can be addressed by better legislation and enforcement.
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