Saturday, June 19, 2010

New York Raises Tobacco Taxes In Bid To Close Multibillion Dollar Deficit

Gov. David Paterson has reached an apparent agreement with legislative leaders to include a $1.60 per pack of cigarette tax hike in the next emergency budget extender.

The move is hoped to bring another $440 million in revenues for a state that has a $9 billion deficit.
The proposal, which officials said Mr. Paterson would include in an emergency budget bill due for a vote on Monday, would also raise wholesale taxes on other tobacco products like chewing tobacco, bringing the tax on those products closer in line with those of cigarettes.

In New York City, which levies steep taxes of its own on tobacco products, a pack of cigarettes would come with a tax of $5.85, making it the nation’s first city to break $5, antismoking advocates said. That would bring the overall cost of a pack of premium cigarettes above $10 in many stores in the city.

The legislation will also include a plan to begin collecting taxes on cigarettes sold off the reservation by Indian tribes in New York, an issue that has provoked confrontations between State Police officers and protesting tribe members in years past.

The proposal would generate $440 million in revenue this year, helping close a state budget gap estimated at over $9 billion. But it is unclear whether there are enough votes to approve the plan in the State Senate, where Republicans have threatened to vote against any emergency budget bill that includes tax increases and some Democrats oppose efforts to collect taxes on cigarettes sold by the tribes.

Should the measure fail, the government would face an unprecedented shutdown. Should it pass, lawmakers must still meet to find ways to close the entire budget gap.

“Our anticipation is that the budget extender will pass, that people will not want to shut down government,” said Robert L. Megna, the state budget director, who briefed reporters on the plan at the Capitol on Friday evening.

Like so much of the state budget, it's based on hopes and wishful thinking that the revenues will appear and that the state will be able to count on revenues from cigarettes sold on Indian reservations - a situation that has resulted in violent conflicts with the Native American tribes in upstate New York.

Tax hikes will not solve the state's dire fiscal problems - only a concerted effort to reduce spending significantly can achieve that. The Governor has at least declared that he would not approve of debt refinancing in order to balance the budget, but unless spending is brought under control, some form of debt financing will be necessary because the state simply cannot count on federal funds to close the deficit.

Moreover, the increases in taxes may result in declining revenues as smokers and tobacco products users go outside New York to buy their cigarettes and tobacco products so as to avoid paying the higher taxes. That could result in significantly lower revenues and exacerbate the revenue problems.

In fact, New Yorkers could go into Pennsylvania where the cigarette tax is $1.60 per pack - or less than half the current rate in New York. Or, they could go into New Jersey where the rate is $2.70 or Vermont where the rate is $2.24. This move may drive some smokers to drive out of state to get their smokes, and it may drive some smokers to give up the habit entirely (which is a good thing for the individual's health - but real bad for the state's budget that counts on that revenue).

The budget is a mess, and with the proposed tax hikes and one-shots and other gimmicks, the state can close about half of the $9 billion deficit. That means that the state still has to figure out how to cut spending on $4.5 billion but don't hold your breath on that one.

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