The good economic news in Gov. Pataki’s proposed budget is a fresh round of $2.5 billion in annual state tax cuts that would provide a strong shot in the arm to business investment throughout New York (assuming the cuts are phased in on schedule after Pataki leaves office).

The bad news is that the governor also wants to raise upwards of $300 million a year from an immediate $1 per-pack increase in the state’s $1.50 tax on cigarettes. Moreover, he is proposing yet another delay in the collection of sales and excise taxes on Indian reservations already the single largest source of tax-free cigarette sales in New York.

No one denies that a higher tax will mean a further decrease in taxable cigarette sales, exacerbating a “serious” existing tax evasion problem. Nor does anyone deny it will also mean a further loss of business for tax-paying (i.e., non-reservation) convenience stores.

Four years ago, when New York State and New York City both raised their taxes to $1.50 per pack, the result was a sharp drop in taxable cigarette sales and a surge in illegal “butt-legging.” The state’s cigarette tax now raises about 14 percent less than it did before the 2002 state and city increases.

Aside from Indian smoke-shops and out-of-state tobacco dealers, the biggest beneficiaries of New York’s last cigarette tax increase were criminals, ranging from small-time smugglers to full-blown terrorist groups.

Pataki’s proposed tax increase would raise the average (legal) retail price for a carton of Marlboros in New York to at least $55 per carton, creating an even more enticing opportunity for shady operators with easy (legal) access to much cheaper cigarettes sold in other jurisdictions.

So why boost the already big profit margin for illegal “butt-legging”? The only explanation advanced by the Pataki administration is that a higher tax will discourage smoking. But a closer look at the proposed state budget reveals the state has its own form of nicotine addiction.

Without the projected increase, the state’s Health Care Reform Act (HCRA) budget will be in the red by fiscal 2008. In other words, this really boils down to a short-term gap closer for a politically sensitive spending program.

Enforcement of a higher tax will only be made more difficult by the governor ‘s simultaneous proposal to delay, for another full year, the scheduled March 1 effective date of a new law enforcing state sales and excise taxes on Indian reservations. The official excuse: State bureaucrats need more time to develop a workable “export decal” program for Indian retailers. Perhaps. But this claim meets with understandable skepticism from anyone who has watched Pataki’s continuing efforts to sidestep the Indian taxation issue over the past decade.

You don’t have to be a smoker or a store owner competing with tax-free Indian venues to believe that yet another cigarette tax increase in New York would be a bad idea. Credible estimates indicate the state can raise at least as much money by taxing sales on Indian reservations. It’s high time this loophole was closed once and for all.