Some of the lost sales undoubtedly resulted from reduced demand -- people quitting smoking or cutting back. However, it appears that smuggling, out-of-state purchases and sales on Indian reservations (where no taxes are collected) are the main reason. According to a new Cato Institute study (pdf), New York City has been waging a losing battle against cigarette tax evasion for 50 years. Well-organized smugglers buy cigarettes in North Carolina, where the tax is just 5 cents per pack, and resell them in New York for easy profits. According to the March 10 issue of U.S. News & World Report, such smuggling is even conducted by terrorists to fund their activities.
Another study by a group of convenience store owners looked at the impact of reduced sales throughout New York State. According to the study, which was conducted by economist Brian O'Connor, untaxed cigarette sales resulting from smuggling, cross-border sales, Internet sales and sales on Indian reservations cost the state as much as $609 million in revenue in 2001 and almost $900 million in 2002. This just represents lost cigarette taxes. Taking account of lost ancillary sales and income undoubtedly would increase the state's overall revenue loss even more.
What is going on in New York is also going on throughout the United States. And the magnitude of the problem is in direct proportion to cigarette tax rates. States with high taxes have high evasion; states with low taxes have little evasion. According to economist Mark Stehr of Drexel University, the 10 lowest taxed states had cigarette tax rates averaging 10 cents per pack in 1999 and had untaxed consumption of 2.6 percent. By contrast, the 10 highest taxed states charged an average of 74 cents per pack and had untaxed consumption of 10.6 percent.
The record is clear that cigarette smokers are not sheep. They do not sit back passively and just pay exorbitant taxes. They take actions to minimize their burden, which have the effect of reducing revenues without reducing consumption. In some cases, such as New York City, lower taxes undoubtedly would actually raise revenue.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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