Thursday, January 10, 2013

TAXES | Lost NYS Cig Revenue–$2.4 Billion

New York State Packs of Cigarettes Sold, Taxed and Untaxed.
Number of packs in millions and tax in $millions.
The Tax Foundation just put out a report saying that New York State has the biggest cigarette smuggling problem of any state in the USA.

It blames the high $4.35/pack cigarette tax. However, a cigarette tax is a Pigovian tax, saving money on NY State health-care costs if smokers are discouraged from smoking by the higher cost.

On the other hand, if there are easy ways to bring in untaxed cigarettes (e.g., by car from a neighboring state), then New York State benefits neither from the Pigou Effect (lower consumption of goods with high negative externalities) nor from the higher revenue it should have earned on the untaxed cigarettes.

What's the impact of the counterfeit on the budget? I have been doing this kind of work long enough to know that these calculations are complex. I have also been around enough to know that reasonable first approximations - if not distorted by subsequent misuse - usually provide pretty good policy guidance.

With that in mind, the chart above suggests that based on the Tax Foundation numbers and the amount actually collected in cigarette taxes in the latest fiscal year, New York State is losing $2.4 billion in uncollected cigarette-tax revenue. Now there's a budget gap-closer. 

The nature of Pigovian taxes is that counterfeiting will always be with us. The snake in the Garden of Eden smuggled an illegal fruit into the diet of Adam and Eve. But the attempt to collect more revenue will either generate more income for NY State or it will reduce smoking. Either way, the State is ahead.