High Cigarette Taxes Feed Black Market in New York
New York State increased its cigarette excise tax rate from $1.11 to $1.50 per pack in April 2002, while New York City dramatically increased its rate from 8 cents to $1.50 per pack in July of that year. Thanks to these hikes, New York City now has the highest cigarette taxes in the country, a combined state and local tax rate of $3.00 per pack.
Consumers have responded by turning to the city’s black market and other low-tax sources of cigarettes. During the four months following the tax hikes, sales of taxed cigarettes in the city fell by more than 50 percent compared to the same period the prior year, affecting state and local budgets.
New York has a long history of cigarette tax evasion by residents. Former governor Malcolm Wilson dubbed the city the “promised land for cigarette bootleggers.” Over the decades, studies by federal, state, and city officials found high taxes have created a thriving illegal market for cigarettes in the city. That market has diverted billions of dollars from legitimate businesses and governments to criminals.
New York Not Alone
As large state government budget gaps have opened in the past year, lawmakers across the country are turning to cigarette taxes for added revenue. Twenty states raised cigarette tax rates in 2002, and more hikes were on the agenda during state legislative sessions this year.
Proponents of high cigarette taxes portray them as levies that improve public health. Yet those taxes have long been known to have a dark side. Since the first state cigarette taxes were imposed in the 1920s, black markets and related criminal activity have plagued high-tax jurisdictions. Such activity has proven resistant to law enforcement curtailment efforts.
The failure of New York policymakers to consider the broader effects of high cigarette taxes has been a mistake repeated across the country in the stampede to maximize tax revenue. The negative effects of high cigarette taxes in New York provide a cautionary tale that excessive tax rates have consequences.
Patrick Fleenor has been chief economist of the Tax Foundation and senior economist for the Joint Economic Committee of Congress. He is the author of “Cigarette Taxes, Black Markets, and Crime,” a February 2003 Cato Institute Policy Analysis.
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The full text of Patrick Fleenor’s February 2003 Cato Institute Policy Analysis is available on the Cato Institute Web site at http://www.cato.org/pubs/pas/pa468.pdf.