TAX NEWS - June 2010

NY Cigarette Tax Hike Ignites New Controversy

As state representatives across the country are struggling to stretch out budgets to cover the remaining fiscal year, cigarette smokers are quickly becoming the new target for generating revenue. This is particularly evident in the state of New York after a proposal issued by Gov. David A. Paterson would increase taxes by $1.60 a pack, making it home to the highest cigarette taxes in the nation.

Naturally, this plan has not gone unnoticed and has not been taken lightly by tobacco retailers and smokers, who are not going to see the bill passed without a fight. While clearly defending their own self-interests, there may be more to their argument than you think. Those opposed to the bill claim that the increased tax will only encourage avid smokers to turn to the black market and remind legislators that New York is already established as one of the top states for contraband cigarettes. In response to previous smoking tax increases, studies revealed that by 1967, 25% of all cigarettes consumed within New York were the result of illegal imports.

While cigarette taxes are nothing new, questions now arise of how to deal with tax free cigarettes sold by Native American tribes, as a large portion of the black market is dominated by Indian entrepreneurs who are taking advantage of internet sales. A number of proposals have been made on how to mediate the situation without leading to violent conflict. One such proposal involves taxing wholesalers who provide to the tribes and implementing a quota on the amount of tax-free cigarettes that would be made available for those within the Native American community.

Even accounting for the inevitable decreases in sales the tax would cause, the new bill is estimated to bring in $440 million in returns this year and help close the current $9 billion budget gap. Advocates for the increased cigarette tax are enthusiastic about not only the much needed revenue that the proposal will generate but the positive effect it will have on the number of cigarette smokers. If fact, research shows that increasing the cost of cigarettes by simply 10% can yield an 18% decrease in smoking among youth.

In the end, the amount of revenue that the cigarette tax will produce and the effect it will have on the amount of smokers highly outweigh any argument posed by opponents. The tax will not only generate much needed funds but the health benefits and decrease in health expenses that is will cause make this bill a no brainer.