Yesterday the New York Times ran an instructive piece detailing the correlation between high tobacco taxes and vibrant black markets:

Itinerant cigarette vendors have long been a fixture in some parts of the city, like bodegas that sell individual cigarettes in violation of state law. But with cigarette prices up and the number of smoke-friendly places down, the black market for loosies is now thriving on the streets.

The administration of Mayor Michael R. Bloomberg has outlawed smoking in restaurants, bars and playgrounds, and outside hospital entrances. Even city parks, beaches and pedestrian plazas are now off limits to smokers. Then there have been successive rounds of taxes — the most recent one, a $1.60 rise in the state tax in July — that raised the price of a pack of cigarettes to $12.50 at many Midtown newsstands.

“The tax went up, and we started selling 10 times as much,” Mr. Warner said. “Bloomberg thinks he’s stopping people from smoking. He’s just turning them onto loosies.”

For the squares reading the ATR blog, "loosies" are loose cigarettes sold separate from a full pack.

It's easy to see why single cigarette purchases are popular and profitable in Manhattan. Lonnie Warner, the black market salesman mentioned above, buys cartons of cigarette shipped to New York City (cigarette tax: $5.85 per pack) from Virginia (cigarette tax: 30 cents per pack) illegally and sells them for a profit a couple cigarettes at a time. It's not legal, but it's lucrative.

The NYT story reads like an episode of The Wire, with Warner shuffling from block to block in search of action, retreating to Harlem to replenish his stash via a network of suppliers. The constant struggle for control of the market can be as bloody as the drug trade. New York in particular has seen violence in response to cigarette tax increases for nearly a decade.

In New York such tax hikes are particularly problematic from a budgetary standpoint, as naive politicians claim to be weaning people off cigarettes by artificially increasing the price. In reality they are simply shifting the tax-paid sales to other states or the black market. People don't quit smoking because of high taxes, they merely find cheaper cigarettes. In the case of Lonnie Walker, that means a "criminal" filling the void.

And for every dollar New Yorkers spend on Mr. Walker's contraband cigarettes, state government is losing about 50 cents in foregone revenue. Maybe they'll get the message and cut the tax to a more realistic level, New Hampshire style.

Posted by Joshua Culling on Tuesday, April 5, 2011 12:53 AM EDT

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