More Evidence of Cigarette Tax Hikes? Negative Consequences

February 7, 2008

On the surface, a tax increase may seem like a logical, straightforward way to bring more money into state coffers. However, taxpayers often change their behavior in response to tax increases, and legislators may not get the huge tax increase they hoped for. There may be other unintended consequences, such as lost business for retailers when consumers turn to the black market, or even increased crime.

The Small Business and Entrepreneurship Council recently released an article on some of the detrimental effects of tobacco tax increases in New York City:

Many state and local elected officials seem to think that tobacco taxes can be jacked up ever higher, that revenues will always rise to pay for more government spending, and that there are no negative effects for the economy.

. . .

But do things always work out the way the politicians assume when it comes to tax increases? Of course not.

Consider several points from an October 2007 analysis of higher cigarette taxes in New York City by the New York City Independent Budget Office. In 2002, the state raised its cigarette tax by $1.50 and the city did so as well, with the total tax hike in New York City registering $3.00. The IBO reported the following:

. . .

• In a 2006 survey, 27 percent of city smokers and 34 percent of smokers across the rest of the state reported buying lower taxed or non-taxed cigarettes. Outside of New York City, cigarettes often are easy to purchase on Indian reservations, and 75% of smokers buying lower taxed or non-taxed cigarettes outside New York City reported doing so. Among city smokers who purchased lower taxed or non-taxed cigarettes, 71% bought across state lines.

• Also in 2006, the IBO estimated that if all of the cigarettes bought in New York City were taxed, the city would have brought in an additional $43 million. However, the IBO also noted that research shows that smoking surveys underestimate actual smoking, so tax evasion could be even higher.

• “The majority of New York City smokers buy their cigarettes from convenience and grocery stores, supermarkets, pharmacies, gas states, and discount stores…”

So, when we’re talking about lost business due to higher taxes, small businesses tend to be the ones hit hardest. Government revenues certainly increase, but not as much as expected, and they tend to subsequently decline with less smoking and more tax evasion. Yet, government spending keeps chugging along, which means that other taxes will have to be increased.

Read the full SBE Council Small Business Fact of the Week here.

For more on tobacco tax evasion and crime related to high cigarette taxes, read the Tax Foundation Special Report California Schemin’: Cigarette Tax Evasion and Crime in the Golden State.


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