By Raising Its Cigarette Tax, N.Y. Gets Lesson In Laffer Curve
12/29/2015 05:42 PM ET
New York has the highest cigarette tax in the country. AP View Enlarged Image Taxation: The state of New York thought it would reap a bonanza after increasing taxes on cigarettes. But there was no bonanza. In fact, the tax take actually fell. New Yorkers, may we introduce Art Laffer?
The result? According to New York State Comptroller Thomas DiNapoli, the state has lost $400 million in revenue over the past five years. And it might be even worse than that.
The New York Post cites a National Academies of Sciences, Engineering and Medicine report that says the state's losses are much bigger — some $1.3 billion in taxes aren't collected each year, due to behavioral changes.
Of course, some of that loss might be considered favorable in that it represents people who simply quit rather than pay the higher levy. Indeed, estimates say that 19% of those who smoked have quit in the last decade.
Taxable sales, however, are down 54% in the same period. If the goal of the higher tax was just to get some smokers to quit, then mission accomplished. But if the goal was twofold — get smokers to quit and raise revenue — then it has failed.
But for many others who still smoke, the behavioral changes haven't been as favorable. Some just pay up. But others simply buy black-market cigarettes, supplied mostly by organized crime. The Tax Foundation estimates that 58% of cigarettes in New York come from out of state. So roughly 6 in 10 cigarettes now are not taxed by New York.
Still worse, the tax has turned into one of the most regressive in the nation. As the Daily Caller points out, households with annual incomes of less than $30,000 spent a whopping 23.6% on cigarettes in the year after the tax was imposed, up from a still-hefty 11.6% in 2004.
By comparison, households with over $60,000 a year in income spent just 2.2% on cigarettes. So another so-called "sin tax" turns out to be little more than a tax on the poor.
The law of unintended consequences is on display once again, as it was during Prohibition. That experiment also reduced revenue dramatically and led to a surge in organized crime.
So is it any surprise that the tax take is shrinking? No. This was in fact entirely foreseeable. But, of course, foreseeing it would have required New York voters and the politicians they put into office to actually learn something about economics.
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