NYC Cigarette Tax Hike Endangers Pataki Health Funding
Topping a list of “proposals of no cost to the state government” in Mayor Michael Bloomberg’s preliminary budget is a nearly eighteen-fold increase New York City’s cigarette tax, to $1.50 from the current 8 cents a pack. Bloomberg says this would raise $250 million to help close his $4.8 billion budget gap.
But a closer look reveals the state could lose almost as much money as the city gains from such a proposal—thus endangering a major portion of the financing for Governor George Pataki’s newly enacted health care initiative.
Picking the Same Pocket
If approved by the state Legislature, the city cigarette tax hike would come right on the heels of an increase in the New York State cigarette tax, which will rise to $1.50 a pack, from an already nation-leading $1.11, effective April 3. Pataki expects this to generate $250 million a year dedicated to state Health Care Reform Act (HCRA) programs.
However, Bloomberg’s revenue estimate assumes that raising the city tax to the same level as the state tax—a combined $3 per pack—would wipe out nearly half of all legal cigarette purchases in New York City, as many more smokers quit, cut back or turn to non-taxed sources for their Camels and Marlboros. This, in turn, would wipe out a chunk of Pataki’s HCRA financing.
Extrapolating from figures in the state and city budgets, adoption of the mayor’s proposal could eliminate up to $212 million in state cigarette tax revenues—85 percent of the gain Pataki is budgeting in this category.
Higher Taxes = Lower sales = Less Revenue
The actual impact of the proposed city tax hike on state tax revenues would depend on how much of the loss in taxable sales in the city (or “leakage,” as tax enforcers call it) is offset by increased sales in neighboring New York jurisdictions such as Nassau and Westchester counties, as opposed to other states, on-line Indian vendors and other non-taxable sources.
The correct answer is literally anyone’s guess—but it’s not unreasonable to speculate that if New York’s combined city and state cigarette is allowed to reach a whopping $30 per carton of 10 packs, the existing revenue leakage would turn into a veritable hemorrhage. Smokers could save at least $18 a carton by buying their cigarettes in any neighboring state —or even more by using a tax-free Internet site.
After all, New York’s high taxes and the resulting higher prices already provide what Pataki’s own budget admits is “an added incentive for smokers to purchase cigarettes in surrounding states, bootlegged cigarettes, or cigarettes sold through mail order or on the Internet to avoid paying the tax.”
Indeed, it’s quite possible that Bloomberg’s plan would raise less revenue than he expects, in which case it would erode even more of the state’s cigarette tax base in the process. All New Yorkers—smokers and non-smokers alike—would have to make up the difference through broad-based taxes or spending cuts, since Pataki’s new HCRA spending is targeted for Medicaid and public health purposes.
A huge increase in cigarette taxes also will require the diversion of more law enforcement resources to fight an inevitable increase in what the Governor’s budget admits is already “a serious problem” of cigarette tax evasion in New York.
It obviously makes little sense to encourage more criminal activity at a time when the city and state budgets are strained by the increased security needs of the war on terrorism. But the potential loss of state revenue is enough to make the Legislature sit up and take notice—and, in all likelihood, reject Bloomberg’s proposal.
POSTED: OCTOBER 17, 2002