Economist: Cigarette Tax Evasion at Tribal Stores Costing NYS $600 Million/yr

ALBANY, NY (03/10/2008)(readMedia)-- The fiscal toll of the New York State tax department’s continued refusal to curb rampant cigarette tax evasion has climbed to more than $1.6 million per day in lost tax revenue, according to a new economic analysis.

If the Spitzer administration enforced the collection of taxes on Native American tribal sales of cigarettes to non-Indian customers – as it is supposed to under current state law – new revenues to the state would range from $575 million to $625 million per year, the report said.

The February 22, 2008 analysis is titled “An Update: Additional Cigarette Tax Revenue Sources For New York State.” It was prepared by economist Brian P. O’Connor, Ph. D., of Ridgewood NJ, a widely respected economic consultant, policy analyst, and former Director of U.S. Economics for IBM Corp. It was commissioned by the New York Association of Convenience Stores, whose tax-collecting retail members have been crippled by a mass exodus of cigarette customers to "tax-free" outlets.

Due to an increase in market share from the large cigarette excise tax rate hikes by New York State and New York City in early 2002 and other state and city governments in recent years, the estimate of the impact of Indian sales to non-Indians is nearly 40 percent higher than in Dr. O’Connor’s original cigarette tax loss study, performed in 2002 for the Fair Application of Cigarette Tax (FACT) Alliance, which the convenience store group was a part of.

“This confirms that New York’s cigarette tax evasion epidemic is spreading,” said James Calvin, President of the New York Association of Convenience Stores. “While the Spitzer administration fiddles, the state continues to lose more than $1.6 million in legitimate tax revenue every day.”

State law directs the Department to pre-collect state taxes on cigarettes and motor fuel from wholesale distributors before they deliver those products to Native American tribal stores. The mandate took effect March 1, 2006. But then-Governor Pataki refused to enforce it even though he signed it, and Governor Spitzer has followed suit even though he promised during the 2006 gubernatorial campaign to implement it.

Dr. O’Connor’s estimates don’t include lost tax revenue on sales of motor fuel by Native American tribal stores to non-Native American New Yorkers and lost sales tax revenue on other taxable products that cigarette and motor fuel customers often purchase during their visit, “but I’m quite sure that if those were factored in, you would be approaching a billion dollars a year in lost tax revenue,” said Calvin.

“Given the alarming magnitude of cigarette tax evasion, this is no time to be talking about increasing New York’s cigarette tax rate,” Calvin pointed out. “That would be like trying to warm up your house in mid-winter by cranking up the thermostat with the windows open.”

“As long as the Spitzer administration turns a blind eye to cigarette tax evasion, any attempt to raise more revenue with a higher tax rate will be utterly self-defeating," said Calvin. "It would only drive thousands more smokers into the arms of unlicensed, unregulated, untaxed outlets – and destroy what’s left of New York’s law-abiding convenience store industry.”

To review Dr. O’Connor’s report, visit this web address: www.nyacs.org/documents/08OConnorstudy.pdf

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