Editor's Note: This article originally appeared in Crain's New York on March 24, 2017.
New York has ostensibly made the health of its people and its treasuries a priority by maintaining high cigarette taxes, but these taxes come with a cost.
The state’s high cigarette taxes have led to rampant tax evasion and avoidance and other ugly, unintended consequences.
Since 2008, we have assessed the degree to which cigarettes are smuggled between states. Through 2015, we estimate that 57% of all the cigarettes consumed in New York are acquired in a different taxing jurisdiction, the highest smuggling rate of any state.
New York imposes $4.35 in taxes per pack, not including additional taxes imposed by localities. These high costs mixed with proximity to lower-taxed smokes is a scofflaw marriage made in heaven. The state is surrounded by lower-taxed ones and has Indian reservations that sell cigarettes for less. Virginia, for example, taxes cigarettes at just 30 cents per pack.
The statistical model we built to measure smuggling compares legal paid sales of cigarettes with published smoking rates. The difference between the two must be explained, and we—and other scholars—point to smuggling. Our model also controls for other factors that may influence smuggling rates, such as the presence of Indian reservations, border county population and distance to a major source state, such as North Carolina.
Last year, IHS Global, Inc., suggested New York’s smuggling rate was 62% in 2015, five points higher than our estimate. A 2015 study sponsored by the National Academy of Sciences and the Food and Drug Administration estimated it at nearly 45%. In 2012, consultant John Dunham and Associates placed it at 52%. Regardless of whose estimate is closest to reality, it’s clear New York’s cigarette market borders on lawless.
Smuggling and associated illegal activities undermine the public health goals that typically support higher taxes on cigarettes. A study by economist Mark Stehr from 2005 reported that as much as 85% of changes in legal paid sales after a tax increase are a result of tax evasion and avoidance, not a result of people kicking the habit. So when legal paid cigarette sales drop, it is less a function of not smoking than of not paying full freight.
Anecdotal evidence also suggests that other forms of crime increase, including brazen thefts of cigarettes from legal retailers and wholesalers, public corruption, violence against people and property and more. The tragic death of Eric Garner in 2014 reportedly stemmed from his selling untaxed cigarettes.
Governments’ war on tobacco is starting to mirror its failed experiment with alcohol prohibition. Rather than fight the powerful tide, New York should roll back taxes to more reasonable levels. Leveling cigarette taxes to those of nearby states isn’t likely to harm public health in any way and may just increase New York tax revenues if enough people switch to buying legal smokes instead of smuggled ones.
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