Cigarette Tax Hike Would Only Feed Tax Evasion Epidemic

ALBANY, NY (06/08/2010)(readMedia)-- Increasing cigarette taxes $1 a pack before getting the state's cigarette tax evasion epidemic under control would be a colossal mistake, New York's convenience store industry said today.

Responding to media reports that Governor Paterson may include the tax hike in this week's emergency appropriations bill, New York Association of Convenience Stores President James Calvin said it would only unleash an even bigger wave of cigarette tax evasion.

"It would be like trying to collect water in a leaky bucket," Calvin said. "The more water you pour in, the more will leak out. The answer is not opening the faucet wider, but plugging the leaks."

The leaks, in this case, are the abundant sources of untaxed or lower-taxed cigarettes available to New York smokers – Native American stores, the Internet, the black market, and neighboring states. Since 2000, the state has quintupled its cigarette excise tax without closing off these channels for dodging the tax, setting off a stampede for cheaper, untaxed smokes.

In a March 2009 report for NYACS, economist Dr. Brian O'Connor found that cigarette tax evasion is now so prevalent that more than half the cigarettes consumed by New Yorkers are purchased without any New York State tax being collected. This deprives tax-collecting retail businesses of legitimate sales, costs state and county governments tax revenue, and defeats the public health policy goal of reducing smoking.

O'Connor concluded that the state was losing around $1 billion a year by not collecting taxes on Indian sales of cigarettes to non-Indian customers alone. Governor Paterson's Tax Department is currently developing regulations to start taxing such sales in accordance with state law. Calvin said this tax enforcement initiative should be implemented before any change in the tax rate. "Doing it the other way around would just make the tax evasion problem that much worse, and harder to fix in the future," he said.

The $1-a-pack increase would represent a jump of 36 percent in the tax rate, yet the projected revenue increase is only 15 percent. "Where's the other 20 percent?" asked Calvin. "Up in smoke, chased to the tax-free side of the street by tax-inflated prices."

"And for those who claim exorbitant cigarette taxes reduce smoking, tell me why Virginia, with only a 30-cent tax, and California, at 87 cents, have lower adult smoking rates than New York, at $2.75," Calvin added.