Cigarette Taxes and the Black Market

Alexander-Hamilton-9326481-1-401Alexander Hamilton introduced the first federal excise tax on tobacco products in 1794, but it was not implemented until the 1860s. Smuggling to evade taxes has been around ever since.

We know that higher prices for cigarettes save lives and deter youth from starting to smoke.  Every 10 percent increase in cigarette prices reduces youth smoking by about seven percent and total cigarette consumption by about four percent. Cigarette tax evasion makes cigarettes cheaper and reduces the public health benefits of excise taxes, as well as deprives New York City and State of much-needed revenue.

In 2010, it was reported that cigarette smuggling cost states with high tobacco taxes about $5 billion in revenue that could have paid for schools, parks and day care centers.  And just as bad, smuggling makes cheap cigarettes more easily available to our youth.

Here in NY State, if all the taxes were collected, tens of thousands of smokers would quit rather than pay higher prices, and NY State revenues would dramatically increase. We believe that reducing cigarette smuggling would not only increase revenue, but also help to stop the tobacco epidemic.

If you track the trail of the black market for cigarettes, you’ll see that, not surprisingly, it flows from low-tax states to high-tax states, e.g., from Virginia ($.30 state tax) to New York ($4.35 state tax).  Cigarette smugglers sell them at a discount while still pocketing a very healthy profit that makes it well worth the risk of smuggling.  On top of the state tax, New York City levies its own excise tax of $1.50 per pack—making the Big Apple an enticing market for cigarette smugglers.

We need to take measures to increase penalties for retailers who evade tobacco taxes or sell cigarettes without a license.  We also need to stop discounts and set a price floor for a pack of cigarettes, ensuring that cheaper cigarettes stay out of the hands of our youth.  The rampant tax evasion that exists in New York State undermines the whole point of higher taxes—to deter youth from smoking and reduce the number of cigarettes that are smoked.

Fortunately, New York City is taking steps to combat tax evasion and reduce youth access and addiction to tobacco products.  The City Council is considering bills to:

  1. ban the display of tobacco products;
  2. impose steep fines and revoke licenses to sell Lotto and cigarettes for the sale, possession, or concealment of untaxed or counterfeit cigarettes;
  3. create a minimum price of $10.50 per pack;
  4. increase civil and criminal penalties for the possession of counterfeit and untaxed cigarettes; and
  5. make it easier for officials to seize contraband.

Some in the small business community have concerns about the proposed legislation.

bodega-ads-Norwood-NewsLast week, Crain’s NY Business reported on a “Save Our Stores” coalition that proudly declares on its website that it is funded by Big Tobacco.  We spoke to Zulay Mateo, the Executive Director of the Bodega Association of the U.S.A., a new member of the coalition, who claims to have 600 active members in NYC.

The “Save Our Stores” coalition argues that the proposed tobacco control measures will increase smuggling and small businesses will lose business, forcing them to cut jobs.

But studies have shown that’s not the case.  Other countries have instituted a tobacco product display ban, and stores did not lose business.  And the proposed pricing legislation doesn’t just create a price floor for a pack of cigarettes ($10.50 per pack), but it will make smuggling far less profitable.

The proposed legislation will not hurt bodegas or any other retailer; rather, it will level the playing field for those honest retailers who don’t sell smuggled cigarettes and play by the rules.

And it will help our kids be healthier.  That’s a win-win.