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Cigarette Taxes, Black
Markets, and Crime:
Lessons from New York’s 50-Year Losing Battle
by Patrick Fleenor
Patrick Fleenor has been
chief economist of the Tax Foundation and
senior economist at the Joint Economic Committee of Congress.
Executive Summary
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 may be on the agenda during state legislative
sessions in 2003.
Proponents of high cigarette taxes portray
them as innocuous 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 to be resistant to
law enforcement curtailment efforts.
Thanks to recent city- and state-level tax
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 bustling black market and other low-tax
sources of cigarettes. During the four months following the recent tax
hikes, sales of taxed cigarettes in the city fell by more than 50 percent
compared to the same period the prior year.
New York has a long history of cigarette
tax evasion. Former governor Malcolm Wilson dubbed the city the "promised
land for cigarette bootleggers." Over the decades, a series of studies by
federal, state, and city officials has found that 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.
Perhaps worse than the diversion of money
has been the crime associated with the city's illegal cigarette market.
Smalltime crooks and organized crime have engaged in murder, kidnapping, and
armed robbery to earn and protect their illicit profits. Such crime has
exposed average citizens, such as truck drivers and retail store clerks, to
violence.
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 from
this demonized product. Too often, policymakers do not consider these
effects in the erroneous belief that people do not respond to
government-created economic incentives. The negative effects of high
cigarette taxes in New York provide a cautionary tale that excessive tax
rates have serious consequences—even for such a politically unpopular
product as cigarettes.
NY State Clamping Down
Concerned about the booming trade in online cigarette sales, New York state
officials have begun using a variety of techniques to clamp down on the
trade, saying New York City alone is losing more than $75 million a year in
uncollected tax revenues because of the sales.
In recent weeks, Attorney General Eliot Spitzer has been pushing local
postal officials and private carriers to stop delivering cigarettes bought
online. His office has also recently begun negotiations with credit card
companies to block transactions of online cigarettes.
These efforts were given added push recently as local officials from the
federal Bureau of Alcohol, Tobacco, Firearms and Explosives met with credit
card executives to alert them to the various ways in which these
transactions are illegal.
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