Cigarette Taxes, Black Markets, and Crime: Lessons from New York’s 50‐​Year Losing Battle

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As large state government budget gaps haveopened in the past year, lawmakers across thecountry are turning to cigarette taxes for addedrevenue. Twenty states raised cigarette tax ratesin 2002, and more hikes may be on the agendaduring state legislative sessions in 2003.

Proponents of high cigarette taxes portraythem as innocuous levies that improve publichealth. Yet those taxes have long been known tohave a dark side. Since the first state cigarettetaxes were imposed in the 1920s, black marketsand related criminal activity have plagued high‐​taxjurisdictions. Such activity has proven to beresistant to law enforcement curtailment efforts.

Thanks to recent city‐ and state‐​level taxhikes, New York City now has the highest cigarettetaxes in the country – a combined state andlocal tax rate of $3.00 per pack. Consumers haveresponded by turning to the city’s bustling blackmarket and other low‐​tax sources of cigarettes.During the four months following the recent taxhikes, sales of taxed cigarettes in the city fell bymore than 50 percent compared to the sameperiod the prior year.

New York has a long history of cigarette taxevasion. Former governor Malcolm Wilsondubbed the city the “promised land for cigarettebootleggers.” Over the decades, a series of studiesby federal, state, and city officials has found thathigh taxes have created a thriving illegal marketfor cigarettes in the city. That market has divertedbillions of dollars from legitimate businessesand governments to criminals.

Perhaps worse than the diversion of money hasbeen the crime associated with the city’s illegal cigarettemarket. Smalltime crooks and organizedcrime have engaged in murder, kidnapping, andarmed robbery to earn and protect their illicit profits.Such crime has exposed average citizens, such astruck drivers and retail store clerks, to violence.

The failure of New York policymakers to considerthe broader effects of high cigarette taxeshas been a mistake repeated across the countryin the stampede to maximize tax revenue fromthis demonized product. Too often, policymakersdo not consider these effects in the erroneousbelief that people do not respond to government‐​createdeconomic incentives. The negative effectsof high cigarette taxes in New York provide a cautionarytale that excessive tax rates have seriousconsequences – even for such a politically unpopularproduct as cigarettes.

Patrick Fleenor

Patrick Fleenor has been chief economist of the Tax Foundation and senior economist at the Joint Economic Committee of Congress.