Smokers Gasp, Not Just From Cigarettes
One state after another is raising cigarette taxes in this year of gaping budget deficits, tapping a source of easy revenue. But the three states in the New York region are going even further, effectively forming a high-tax district of their own.
If New Jersey raises its tax on each pack of cigarettes to $1.50, a measure that is moving quickly through the Legislature, it will be tied with New York for the nation's highest cigarette tax. Connecticut, at $1.11 a pack, would be No. 5. And in New York City, which will add $1.42 starting Monday, smokers will be paying $7.50 a pack.
The tax increases keep most of the region's smokers geographically locked in â€” only those who live near Pennsylvania, where the average price of a pack is $3.60, can save much by crossing state borders â€” while pushing the average price above $5 a pack. The national average is about $3.75.
But location isn't everything. Smokers can save $20 a carton â€” and $40 a carton if they live in New York City â€” by buying through the Internet, on Indian reservations, in low-tax states like Virginia and Kentucky or from illegal sources. And assuming that they will, many tax experts and economists say the revenue projections accompanying the new cigarette taxes are disingenuous or erroneous.
For years, state tax officials have been able to predict fairly accurately how many people will quit smoking or turn to other sources after a tax increase, and have adjusted their revenue projections accordingly. But now, at least in New York and New Jersey, the incentive for tax evasion, and the ease of using the Internet to do it, is greater than ever. The question is how many will cheat.
In New Jersey, Gov. James E. McGreevey proposed an increase of 50 cents, to $1.30 a pack, but the figure was raised to 70 cents in the State Assembly, which approved it yesterday. The Senate rejected an amendment matching the raise, but it will be subject to negotiations before a vote on the bill.
State officials' projections anticipate a drop in cigarette sales of about 15 percent. If sales remained steady, the proposed tax increase to $1.50 a pack would bring in $338 million, but the state projects $275 million in new revenue.
In Washington State, which raised its tax to $1.42 from 82 cents on Jan. 1 and is now second to New York State in the price of cigarettes, sales have dropped about 17 percent, said Bret Bertolin, the senior forecaster at the state's economic forecasting council. The council has projected a 19 percent decline for the year, Mr. Bertolin said.
Most Washington residents live too far from state borders to shop in Oregon or Idaho, though convenience stores there have reported a boom in cigarette sales, and state officials doubt that many smokers have quit. Rather, they guess, most of the missing sales have gone to Indian reservations, where cigarettes are sold free of any taxes, or to Internet vendors.
New York State's most recent increase, to $1.50 a pack from $1.11, was less drastic than Washington's, and tax officials say it is too early to tell what effect the increase has had since it took effect in April. Gov. George E. Pataki projected that it would raise $251 million.
Robert L. Shepherd, the former deputy commissioner for tax enforcement in New York State, said he expected growing Internet sales. "Instead of purchasing a carton for $70 in New York City or $50 in Trenton, you get it for $30 over the Net," he said.
Mr. Shepherd said smuggling would increase, too, with "guys putting a few cartons in a gym bag and selling on the street, $3 or $4 a pack."
Mr. Shepherd, a lawyer who now represents distributors who supply convenience stores with cigarettes, among other goods, predicts that the $1.50 tax will actually cost the state money. He cites the example of Canada, which imposed a $5-a-pack tax in 1991 and lost most of its sales to smuggling. Tax collections increased when the tax was halved three years later.
"I think with $1.50 they'll pass the tipping point, yes." Mr. Shepherd said of the New York tax.
A report last year by Forrester Research, a Boston-based market research company, projected that by 2005 the Internet would account for 14 percent of cigarette sales. The report predicted that states with the highest taxes, like New York and California, would eventually lower their rates to keep up revenues.
Others are skeptical of such claims. Marc Carey, a spokesman for the New York State Department of Taxation and Finance, said that agents had seen no notable increase in smuggling since April.
Kurt M. Ribisl a professor of public health at the University of North Carolina, said that no state tax increase had ever caused a decline in revenue. A survey taken after a 50-cent cigarette-tax increase in California three years ago showed that only 5 percent of buyers had turned to no-tax or low-tax sources.
Nonetheless, Mr. Ribisl said that tax evasion would rise and that Internet sales would account for much of it. In a study he published last year, Mr. Ribisl found 88 Internet vendors, 49 of them on Indian reservations. In updating the survey this year, he found 195 vendors.
Those sellers are largely beyond official tracking systems, and certainly bootleggers are. A federal law requires mail-order merchants to report the names of buyers to the buyers' states, but few do, and the law is rarely enforced. Buyers are required to report purchases from Indian reservations or Internet sellers and immediately pay the state tax; when asked if anyone ever does this, Mr. Shepherd replied: "Never. Never."
Whatever the wisdom of the tax increases as fiscal or law enforcement policy, many public health advocates say the less calculable benefit of discouraging smoking justifies any tax increase.
Professor Ribisl said tax increases consistently cut consumption, even if smuggling did rise. And when Mayor Michael R. Bloomberg proposed raising New York City's tax, he said his principal goal was deterring teenagers from smoking. "The numbers are clear," he said. "You raise cigarette taxes, the kids smoke less."
By and large, the rest of the country agrees. This year 10 states have raised taxes. Massachusetts is considering overtaking New York with a tax increase to $1.51 a pack, and in Pennsylvania the governor has proposed raising the tax to $1.
Still, a few states hold out. A proposal to raise Delaware's 24-cent tax has died in the Legislature, and Virginia refuses to budge from 2 1/2 cents.
"They tried to raise it by a penny â€” a penny!" said David Brunori, a lawyer and contributing editor to the journal State Tax Notes and a Virginia resident. "And the Legislature said, `Oh, come on, that's not fair,' and defeated it. A penny!"