Thursday, November 11, 2010

Cigarette Tax Hike Means New York State Budget Shortfall

Once again, the efforts to reduce smoking via increases in taxes may have unintended consequences for state budgets. New York raised the cigarette tax and is now finding that revenues have dropped off a cliff.
The Post reported in August that retailers said sales were off by as much as 45 percent in stores bordering low-tax states like Pennsylvania and Vermont, as well as tax-free Indian reservations in western New York and on Long Island.

The hike raises the average price of a pack of Marlboros to $11.60 in New York City, compared to $5.93 in Matamoras, Pa.

Anecdotal reports suggest sales are booming on in-state Indian reservations, where tribes have so far stymied Paterson's efforts to collect taxes on cigarettes sold to non-Native Americans.

"That's what we warned would happen, and obviously it has come to fruition," said James Calvin, of the New York Association of Convenience Stores.

"Every tax increase drives more smokers to that dark, shadowy, unregulated, unlicensed, untaxed side of the street. The whole policy is self-defeating."

If the trend continues, the state could fall far short of the $260 million windfall Paterson expected from the 58 percent tax hike.

The increase has brought in only $13.8 million a month, according state sales figures, which means the plan could be as much as $136 million in the red by March 31.

Budget Division spokesman Erik Kriss said fiscal analysts factored a 22 percent drop in cigarette sales into their estimates.

"We feel we're going to be on target for the fiscal year," he said.

Budget officials did recently lower by $113 million the sum it expects to collect by taxing reservation sales of cigarettes.
Some sales were lost due to smokers quitting, but other smokers simply shifted their sales to other states or Indian reservations, where New York has been unable to secure tax revenues from cigarette purchases.

While reducing the number of smokers is good for the overall health of the population and can reduce health care costs, the programs funded by tobacco taxes are getting hit because of the combination of overly optimistic tax revenues and funding levels that did not anticipate the lower revenues. That means that some of the very health programs funded by tobacco taxes are in jeopardy because the revenues simply aren't there. Other revenue sources will need to be increased to make up for the deficiency - that means tax hikes or program cuts.

Throw in the latest warning label proposals that amplify the already existing smoking warning labels and tobacco sales should continue to fall.

It also means that the tobacco taxes are running into a wall where politicians will no longer be able to rely on such taxes to balance budgets or fund health programs, even though the revenues are sorely needed to balance budgets around the country.

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