This article originally appeared in the Wall Street Journal March 10.
New York has created a cigarette-smuggling empire, and the worst is yet to come. It’s the unavoidable consequence of the state’s decadeslong history of raising the cigarette tax, which Gov. Kathy Hochul wants to continue with an additional levy of $1 a pack. She also wants to ban flavored cigarettes. This will only lead to more lawbreaking and less tax revenue, defeating its purpose.
We have spent more than 15 years studying cigarette trafficking, comparing legal paid cigarette sales in states with their published smoking rates. In New York, there’s a huge discrepancy: Many more cigarettes are smoked than bought—a clear sign of tax evasion and avoidance. New Yorkers are buying cigarettes from illegal sellers and crime syndicates, which don’t charge taxes. They also buy them out of state, where taxes are lower. New York already imposes a statewide pack tax of $4.35 a pack, tied with Connecticut for highest in the nation (the District of Columbia’s tax is $4.50). New York City imposes additional excise taxes of $1.50 a pack.
High taxes lead to large-scale smuggling. In 2020 we found that New York’s smuggling rate exceeded 53%—the highest in the nation. That means more than half of all cigarettes sold in New York were smuggled. From 2011 through 2020, more smokes were smuggled into New York than any other state.
Smuggling will soar even higher under Gov. Hochul’s proposal. We estimate that if cigarette taxes are raised another dollar, to $5.35 a pack, the state’s smuggling rate would jump to nearly 61% of the market. When you factor in a ban on flavored cigarettes, the smuggling rate rises even higher, to nearly 66%. If the governor gets her way, 2 out of 3 cigarettes smoked in New York state will have been smuggled.
Other states show what’s in store. Massachusetts effectively imposed a ban on flavored cigarettes in mid-2020. We found that smuggling there leapt nearly 7% after the ban took effect. What’s more, sales of flavored cigarettes increased in surrounding states. That means Bay State residents didn’t stop purchasing cigarettes; they bought them in lower-tax jurisdictions like New Hampshire.
Widespread and growing tax avoidance leads to less tax revenue, a key reason Ms. Hochul wants to raise taxes. New York lost more revenue in 2020 than any other state except California, thanks to its high taxes on cigarettes. Without smuggling, the Empire State would rake in almost $1.1 billion more a year in cigarette-tax revenues. We estimate that a $1 tax increase would translate into a revenue decline of $46 million. A tax increase coupled with a ban on flavored cigarettes would mean a decline of $167 million.
Our study isn’t the first to find that New York state and New York City are awash in smuggled smokes. Numerous studies over the past decade, including one funded by the U.S. Food and Drug Administration, showed significant cigarette-tax avoidance and evasion, especially in the city. Research also shows that raising taxes again will likely do little to dissuade people from smoking. The people who still buy cigarettes are dedicated smokers: Their preference for smoking overcomes the deterrent power of any levy. If these people are told to pay even more, they have a greater reason to buy smuggled cigarettes.
Finally, and most concerningly, the rise in smuggled cigarettes will lead to more crime. Differences in cigarette-tax rates have inspired murder-for-hire plots, robberies and other violence and property crimes. Ms. Hochul should ask if higher taxes are really worth an increase in crime.
New York can’t keep tobacco, drugs and other contraband out of its prisons and jails. How does it expect to stop smugglers from finding ways to bring untaxed cigarettes into the state? It’s hard to see a scenario in which Ms. Hochul’s proposal would achieve its ends or have a positive impact. The negative consequences are easy to predict—they’re happening now. New York should be looking for ways to end cigarette smuggling. One great way to start is by not increasing taxes even more.
Permission to reprint this blog post in whole or in part is hereby granted, provided that the author (or authors) and the Mackinac Center for Public Policy are properly cited.
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