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PROPOSED CIGARETTE TAX HIKE IS REGRESSIVE, WOULD INCREASE ALREADY-THRIVING BLACK MARKET IN NEW YORK 

May 18, 2020

By: Lindsey Stroud

KEY POINTS:

  • A10418 and companion bill S8330 would increase the state’s excise tax on cigarettes by $1.89 a pack, from $4.35 to $6.24 per pack. New York City imposes an additional local excise tax of $1.50 per pack, with the new legislation, this would increase to $7.74 per pack in NYC.

  • Tobacco taxes disproportionately impact lower-income people, who spend a greater share of their income on tobacco products. A Cato Journal article notes that from 2010 to 2011, “smokers earning less than $30,000 per year spent 14.2 percent of their household income on cigarettes, compared to 4.3 percent for smokers earning between $30,000 and $59,999.”

  • Cigarette taxes are also inherently unreliable, and while an increased tax on cigarettes and tobacco products might create short-term fiscal increases, these taxes eventually lead to long-term revenue shortfalls.

    • The National Taxpayers Union Foundation found from 2001 to 2011, “revenue projections were met in only 29 of 101 cases where cigarette/tobacco taxes were increased.” 

    • Pew Charitable Trusts revealed a decline in cigarette consumption caused cigarette tax revenue “to drop by an average of about 1 percent across all states from 2008 to 2016.”

  • The increased tax will also increase smuggling. NYC is already considered “the cigarette smuggling capital of the nation,” with a black market that cost the city approximately $750 million in 2015. According to the Tax Foundation, New York state “has the highest inbound smuggling activity, with an estimated 55.4 percent of cigarettes consumed in the state deriving from smuggled sources in 2017.”

    • In late January, 2020, a Staten Island resident was convicted of tobacco smuggling, including transporting “almost $40 million worth of tobacco from Pennsylvania to New York.

  • New York spends very little on tobacco prevention efforts. In 2019, the Empire State received an estimated $2.0371 billion in tobacco taxes and tobacco settlement payments, yet in the same year, New York dedicated only $39.3 million, or 1 percent, on tobacco control programs, including education and youth prevention.

  • It is estimated that between 1999 and 2019, New York collected $16 billion in tobacco settlement payments and another $23 billion in tobacco taxes and “has spent less than $1 billion on tobacco control” since 1999.

  • Further, due to New York sharing the costs of Medicaid with localities, local governments are apportioned a share of tobacco settlement payments with little to no accountability to where those funds are going. Indeed, in Niagara County, $700,000 of tobacco settlement monies “went for a public golf course’s sprinkler system, and $24 million for a county jail and office building.”

  • Deeply problematic with the proposed legislation is that is has been introduced after New York lawmakers approved a budget that banned the sale of flavored electronic cigarettes and vapor products.

  • In 2018, vape shops contributed more than $1.9 billion in economic activity to the Empire State. Further, the vapor industry created 4,416 direct vaping-related jobs, including manufacturing, retail, and wholesale jobs in New York, which generated $237 million in wages alone. In the same year, New York received more than $99 million in state taxes attributable to the vapor industry.

After banning the sales of flavored vapor products and essentially eliminating a nearly two-billion-dollar industry, lawmakers in the Empire State are looking at generate additional revenue from smokers.

A10418 and companion bill S8330 would increase the state’s excise tax on cigarettes by $1.89 a pack, from $4.35 to $6.24 per pack. New York City imposes an additional local excise tax of $1.50 per pack, with the new legislation, this would increase to $7.74 per pack in NYC. The additional revenue is not earmarked for any particular program.

Cigarette taxes are inherently regressive and disproportionately impact lower income persons. Further, they are unstable sources of revenue and should not be relied on for state budgets. Moreover, if lawmakers are seeking to generate revenue, they should reverse their ban on flavored vapor products.

Tobacco taxes disproportionately impact lower-income people, who spend a greater share of their income on tobacco products. For example, a Cato Journal article notes that from 2010 to 2011, “smokers earning less than $30,000 per year spent 14.2 percent of their household income on cigarettes, compared to 4.3 percent for smokers earning between $30,000 and $59,999 and 2 percent for smokers earning more than $60,000.”

Cigarette taxes are also inherently unreliable, and while an increased tax on cigarettes and tobacco products might create short-term fiscal increases, these taxes eventually lead to long-term revenue shortfalls. The National Taxpayers Union Foundation found from 2001 to 2011, “revenue projections were met in only 29 of 101 cases where cigarette/tobacco taxes were increased.” Pew Charitable Trusts revealed a decline in cigarette consumption caused cigarette tax revenue “to drop by an average of about 1 percent across all states from 2008 to 2016.”

New York’s cigarette and tobacco product tax collections have steadily declined over the past 10 years. For example, in the 2010-11 fiscal year, the Empire state collected over $1.6 billion in tobacco taxes, this declined to an estimated $1.113 billion in the 2018-19 fiscal year.

The increased tax will also increase smuggling. NYC is already considered “the cigarette smuggling capital of the nation,” with a black market that cost the city approximately $750 million in 2015. According to the Tax Foundation, New York state “has the highest inbound smuggling activity, with an estimated 55.4 percent of cigarettes consumed in the state deriving from smuggled sources in 2017.” Indeed, the Tax Foundation notes that the smuggling rate correlates with the state’s cigarette tax rate, finding that cigarette smuggling in the Empire State “has risen sharply since 2006 (+55 percent), as has the tax rate (+190 percent).” In late January, 2020, a Staten Island resident was convicted of tobacco smuggling, including transporting “almost $40 million worth of tobacco from Pennsylvania to New York.”

Due to the high taxes, New York is already losing out on tobacco tax revenue. In 2011, the New York Department of Health estimated that cigarette tax smuggling “cost the state $465 to 610 million in 2010.” In 2010, New York imposed an excise tax of $1.60 per pack.

The increased excise tax is deeply problematic as it is merely a revenue generating measure and would not be allocated to tobacco control programs, despite New York spending very little on tobacco prevention efforts. In 2019, the Empire State received an estimated $2.0371 billion in tobacco taxes and tobacco settlement payments, yet in the same year, New York dedicated only $39.3 million, or 1 percent, on tobacco control programs, including education and youth prevention.

Indeed, New York has consistently dedicated very little of tobacco monies to tobacco control programs. It is estimated that between 1999 and 2019, New York collected $16 billion in tobacco settlement payments and another $23 billion in tobacco taxes and “has spent less than $1 billion on tobacco control” since 1999.

Further, due to New York sharing the costs of Medicaid with localities, local governments are apportioned a share of tobacco settlement payments with little to no accountability to where those funds are going. Indeed, in Niagara County, $700,000 of tobacco settlement monies “went for a public golf course’s sprinkler system, and $24 million for a county jail and office building.”

Deeply problematic with the proposed legislation is that is has been introduced after New York lawmakers approved a budget that banned the sale of flavored electronic cigarettes and vapor products – tobacco harm reduction tools that have helped thousands of New Yorkers quit.

The ban, taking effect on May 18, is essentially eliminating reduced harm options for adults, while simultaneously stopping billions of dollars in economic activity. In 2018, vape shops contributed more than $1.9 billion in economic activity to the Empire State. Further, the vapor industry created 4,416 direct vaping-related jobs, including manufacturing, retail, and wholesale jobs in New York, which generated $237 million in wages alone. In the same year, New York received more than $99 million in state taxes attributable to the vapor industry.

Lawmakers should refrain from regressive excise taxes that inherently unreliable. Moreover, it is disingenuous that lawmakers in New York would continue to rely on smokers while eliminating tobacco harm reduction options and spending a dismissive amount on tobacco control programs. Policymakers should look at ways to reintroduce flavored e-cigarettes back to the market in an effort to reduce smoking-related health care costs.

Nothing in this analysis is intended to is intended to influence the passage of legislation, and it does not necessarily represent the views of Tobacco Harm Reduction 101. For more information on vapor products in the Empire State, please visit Tobacco Harm Reduction 101’s New York page at https:///www.thr101.org/new-york.

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©2020 by Tobacco Harm Reduction 101.