Surprise! New York Losing Revenue After Tobacco Tax Increase

Michi Iljazi

January 15, 2016

In a not so shocking development, the state of New York is finding out how ineffective and damaging excise tax increases can be to state and local economies.   According to The Daily Caller, “New York raised taxes on cigarettes to $4.35 in 2010 from $2.75. In total, cigarette taxes have increased by 190 percent since 2006. The sharp rise has resulted in a raft of unintended consequences which are dealing a significant blow to the state’s finances.  New York State Comptroller Thomas DiNapoli reports New York’s revenue from cigarette taxes has plunged by $400 million over the past five years.”

The Taxpayers Protection Alliance (TPA) is hardly surprised or amused at what amounts to yet more proof of the failure of ‘tax first’ policies.

Five years later and nearly half a billion dollars of lost revenue for a single state is terrible news for taxpayers but also vindication for many advocates (including TPA), who have long warned that raising tobacco taxes would not solve any of the perceived problems that lawmakers used to justify those very tax increases. Furthermore, as TPA and others have predicted for years, these types of revenue losses are leading to increased black market activity. The 54% drop in packs sold in the last ten years in New York has benefitted neighboring states as well as illicit tobacco traders in the United States:

Instead, more smokers are buying cigarettes in ways that avoid New York’s $4.35 per pack tax, the highest in the nation. They cross state lines, shop from black market vendors and travel to Native American outlets to save $6 per pack or more, experts say.

The black market for cigarettes is a real problem in the state of New York, and tobacco taxes are a major factor in its rise. Last August an investigation conducted by New York University detailed the increasing level of illegal cigarette sales in the Empire State:

Researchers found that 15 percent, or 125 of the 830 packs, had either counterfeit or out-of-state stamps. More than 10 percent of all stamps were counterfeit, while 4.5 percent carried stamps from Virginia. Virginia does not have a minimum legal price for cigarettes and imposes a cigarette excise tax of 30 cents per pack – the second-lowest in the country.

This should not be shocking to anyone, especially when you consider that in 2013 a report from the Tax Foundation showed that New York had the highest inbound cigarette smuggling rate in the country at 58 percent.

Even worse for New Yorkers is the refusal of the current leadership in Albany to recognize the problem, and instead compound it for taxpayers and consumers. In 2011 Governor Andrew Cuomo (D-N.Y.) went to federal court in order to force the collection of taxation from Native American tribes through wholesalers, but many of the tribes stopped using the wholesalers altogether to avoid paying the taxes.

The latest data continues to prove beyond any reasonable doubt that excise tax increases are hardly beneficial for taxpayers or consumers. State governments that rely on these types of taxes as a way to fix a budget shortfall are simply looking for “fool’s gold” that will never produce the desired results for either budgetary or health and safety concerns. TPA hopes that Governor Cuomo, and many other Governors around the country will do what’s best for taxpayers and state budgets by cutting spending where feasible. 2016 is a new year, it’s time to leave the tax increases behind.

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