Commentary

New York’s Deadly Cigarette Tax

By Patrick Fleenor
This article was published in the New York Post, May 26, 2003

Earlier this month, federal authorities announced the arrest of 10 people charged with smuggling millions of dollars worth of cigarettes from Virginia to New York. The smugglers are now also being investigated for possible terrorist ties. Two weeks earlier, New Jersey police stopped a truck headed to New York City and found more than $1 million of bootleg cigarettes.

Those are only the latest in a series of busts of large operations supplying New York City’s cigarette black market. That market received a big boost last year when Mayor Michael Bloomberg hiked the city’s cigarette excise tax from 8 cents to $1.50 per pack. That hike, coupled with a series of recent increases in the state cigarette tax, has pushed the price of legal brand name cigarettes to more than $7.50 per pack. As a result, it is possible to earn hundreds of thousands of dollars on every truckload of cigarettes smuggled into the city.

Competing with smugglers to supply the city’s illicit market are thieves who target businesses that distribute and sell cigarettes. The Bureau of Alcohol, Tobacco and Firearms reports that there has been a dramatic rise in the number of tobacco thefts in the NYC region in recent years. Law enforcement authorities as far away as Virginia and North Carolina have also reported a rash of heists that they think were aimed at supplying the city’s growing illegal market.

The recent rise in New York’s cigarette-related crime is no surprise after looking at the bloody history of the city’s illicit cigarette trade in my recent Cato Institute study. Problems began after New York State raised its cigarette tax in response to the 1964 Surgeon General’s report on smoking and health. That encouraged organized crime to muscle its way into the smuggling racket. By 1967, officials estimated that one quarter of the cigarettes consumed in-state were the product of bootlegging. The problem was thought to be greater in the city.

The tax hikes also spurred crime against legal businesses. The chairman of a New York State commission that investigated the illicit tobacco trade stated that the tax hikes caused distributors and retailers to be “confronted almost daily with the risk and dangers of personal violence which are now inherent in their industry.” To the dismay of other states, the crime associated with New York’s illegal cigarette trade spread beyond its borders. Across the country, trucks carrying cigarettes were hijacked and businesses selling cigarettes were robbed to supply New York’s black market.

State and city officials experimented with a variety of ways to control the crime, including mandatory prison sentences for cigarette bootleggers, expanded police powers of search and seizure, and more industry regulation. But none of those measures had much effect. Finally, by the mid-1970s, with tobacco-related crime rising and governments and business losing millions of dollars to bootlegging, a special state commission recommended that the city’s cigarette tax be repealed. New York Governor Malcolm Wilson embraced that proposal and said, “One major incentive to organized crime is the high New York City cigarette taxes, piled on top of the state tax, which have made that city the promised land for cigarette bootleggers.”

While the governor fought hard for cigarette tax repeal, parochial politics scuttled its passage. However, escalating violence, including a series of homicides resulting from turf battles and efforts to silence witnesses, discouraged policymakers from further tax hikes in the late 1970s and early 1980s. That allowed the high inflation of the era to reduce real cigarette tax rates by more than 40 percent, which sapped the profitability of bootlegging and reduced smuggling and related crime.

The lessons learned from New York’s tax-induced crime wave were short-lived. By the late 1980s, New York State’s cigarette taxes were again on the rise, prompting one official in the state’s tax enforcement office to note that “in New York it is literally more profitable to hijack a cigarette delivery truck than an armored truck.” Today, at least half of the cigarettes consumed in New York City have somehow avoided state and city excises. ATF officials report that in addition to traditional organized crime, street gangs and terrorist groups are now also involved in the city’s illicit cigarette trade.

Apparently more interested in meddling in individuals’ choices than reducing crime, Mayor Bloomberg imposed a nearly nineteen-fold increase in the city’s cigarette tax rate. To the mayor, the policy prescription is simple: “We all know that smoking kills. And increasing the cigarette tax saves lives.” But it isn’t that simple. The widespread availability of cheap cigarettes via the black market makes his claim dubious. Worse, the mayor’s paternalistic effort to protect smokers from themselves has placed other Americans at greater peril.

Patrick Fleenor, former chief economist of the Tax Foundation, is author of the study “Cigarette Taxes, Black Markets, and Crime” published by the Cato Institute.