NCPA - National Center for Policy Analysis


November 10, 2008

With their coffers already diminished by the financial crisis, some cities are focusing on another source of leaked tax revenues: the trade in bootleg cigarettes, says BusinessWeek. 

And nationwide, the bootleg trade is "thriving," says Patrick Fleenor, chief economist for the Tax Foundation.  In his 2003 study, he notes that large state government budget gaps have forced lawmakers to turn to cigarette taxes for added revenues.  In 2003, 20 states raised cigarette tax rates, and thanks to recent city- and state-level tax hikes, cigarette tax evasion is on the rise, says Business Week:

  • In September, a smuggler was sentenced to 30 months in prison and ordered to pay taxes owed on millions of cigarettes he hauled from low-tax Kentucky to resell in Chicago, bypassing the city's $3.66-a-pack tax.
  • Also in September, New York City sued retailers on a Long Island Indian reservation to stop them from allegedly selling millions of untaxed cigarettes that wind up on store shelves and street corners in the city.
  • The per-pack tax in New York City rose to $4.25 in June, bringing the total price to $9 (Reservation residents can buy tobacco tax-free.)
  • Statewide, some $1 billion in taxes is lost yearly because of such sales by reservation retailers, the city says.

If more and more states join in raising cigarette taxes, it will only exacerbate the problem, warns Fleenor.   Too often, policymakers do not consider those effects in the erroneous belief that people do not respond to government-created economic incentives.  But they obviously do.  High tax rates have serious consequences -- even for such a politically unpopular product as cigarettes.

Source: Lawrence Delevingne, "Tax Revenues Up In Smoke," BusinessWeek, October 27, 2008; based upon: Patrick Fleenor, "Cigarette Taxes Are Fueling Organized Crime," Tax Foundation, May 7, 2008, and Patrick Fleenor, "Cigarette Taxes, Black Markets, and Crime: Lessons from New York's 50-Year Losing Battle," Cato Institute, Policy Analysis, No. 468, February 6, 2003.

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