In his State of the State address, New York’s Governor Paterson proposed raising the already high $2.75 per pack excise tax on cigarettes. When the state excise tax is combined with local and federal taxes, a pack of cigarettes can cost almost $10, leaving New York with the most expensive cigarettes in the country.
But aren’t high cigarette taxes great? Don’t they bring in more revenue? The idea that raising already high excise taxes to bring in more revenue is ignores a fundamental principle of economics: raising the price of something will always lower the demand of the good. Arkansas, Maryland, New Jersey, and Chicago have all raised cigarette taxes only to have their tax blow up in their face as revenue fails to meet projections.
Some consumers will go into other states to buy cigarettes, opening a black market in cigarette smuggling that lowers state tobacco revenue as well. Out of all the cigarettes smoked in the state of New York 20.9 percent are smuggled in from other states. Cigarette smugglers, who are more serious than the casual consumer who crosses the border and picks up a pack, can make tens of thousands off of a single vanload of cigarettes. Not only is this a blow to state revenue, but it is a boost to crime as profits finance theft of untaxed cigarettes, thefts of state tax stamps, counterfeiting of name-brand cigarettes, and violence against residents and police officers.
Rather than continue to burden the taxpayer, cigarette consumers, and businesses that sell cigarettes – and rather than aid those who smuggle and are involved in the black market – Governor Paterson and the New York legislature should actually lower the tax. A lower tax will allow New York stores to compete with others in low-tax states and reduce smuggling to still generate some revenue that New York seeks.