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A County-Level Cigarette Tax in Nassau County?

3 min readBy: Gerald Prante

One county offiicial in Nassau County, NY (Long Island) is proposing a county-level cigarette taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. to help fill the county government’s coffers. From Newsday:

Nassau County Executive Thomas Suozzi is headed to Albany Tuesday to lobby state legislators for his proposals to enact a county cigarette tax and install red-light cameras, even though some lawmakers have expressed mixed reactions.

“I think this is a normal process you’ve got to go through,” Suozzi said. “State legislators want to hear what our concerns are, and we want to hear what their concerns are. It’s part of the process.”

Suozzi made splashes last month with his proposals for a $2-per-pack county cigarette tax and the red-light camera program. But both ideas require the approval of the state Assembly and Senate.

It is often very difficult to raise substantial amounts of revenue with such local taxes on products given the ease with which consumers can cross the border to shop in lower-tax jurisdictions. And the border problems associated with cigarette taxes have been well-documented.

Also, the more borders there are surrounding a high-tax area, the more border activity can take place. This is true of any tax. It is much more difficult for a county to have a very high tax on a given product without losing a substantial number of sales to other counties than for a larger geographic area like a state or country (or even an economic union like the E.U.). It all comes back to the price elasticity of demand of the product, which is a function of the availability of substitutes.

That said, Nassau County is in a somewhat unique situation geographically. Because it is on Long Island, some consumers may have a much more costly commute to avoid the tax than, say, consumers in a county that was bordered by land on all sides. (This is also the case with sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es in Florida: because it is a peninsula and many residents live far away from Alabama and Georgia, it is easier for the state to raise its sales tax without fear of significant losses in economic activity.) On the other hand, the total additional cost of commutes may be small if those individuals already commute frequently to other jurisdictions (possibly to work). Also, profit-seeking black-market dealers would have a very easy time commuting from a lower-tax jurisdiction to Nassau County to sell the product.

Avoiding the tax (either through black-market dealers or by commuting to lower-tax entities) would be much more difficult if this were a tax imposed by a higher government, such as the state of New York. And it would be even more difficult if such a tax were imposed by the entire Northeast region somehow. And it would be even more difficult to avoid the tax if it were imposed by the federal government.

We see this same phenomenon with other taxes, and not just on consumer products. Local income taxes often must be accompanied by a mechanism for taxing commuters, or some residents will merely move and commute to work, which in turn lowers the demand for housing in that jurisdiction, which lowers the property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. revenue, and so forth. The District of Columbia often argues that its inability to tax commuters from Maryland and Northern Virginia puts it in such a situation. Hypothetically, if D.C. were to merge with Maryland and/or Virginia, such a problem would be minimized as the substitutability option would be essentially erased.

Overall, whether such tax competition is good or bad depends on the extent to which it prevents a classic public choice problem of an inefficiently large state versus the possibility that it could lead to an underprovision of public goods. See a previous blog post on this topic.