Unscrupulous Cigarette Bargains
Jacob Sullum | April 10, 2008, 12:27pm
Last week I noted plans to raise New York state's cigarette tax, now $1.50, to $2.75, and estimated that the increase would boost the price of a pack in New York City, which imposes a $1.50-a-pack tax of its own, above $9. On Wednesday, in a completely unrelated development, a guy was busted in New York City with millions of dollars in counterfeit cigarette tax stamps:
The fake stamps would have allowed unscrupulous cigarette dealers to evade nearly $6.1 million in state and city taxes, authorities said....
State excise tax investigator Marybeth Cherubino, who was the lead agent on the case, said that, besides dealing in counterfeit tax stamps, Al-Nablisi bought 375,000 packs of untaxed cigarettes in February from undercover investigators.
''He wanted as much as we could supply,'' she said....
The arrest comes as some authorities voice concern about whether New York state's planned $1.25-per-pack hike in tobacco taxes, taking the price of a pack in the city to about $9, will fuel demand for contraband cigarettes.
Health surveys have found that more than a third of New York state smokers already regularly buy cigarettes from untaxed sources.
If you live in South Carolina and you're planning a drive to New York, you might want to wait until the state legislature approves the new budget. And rent a van.
[Thanks to James Feldman for the tip.]
Rememberin' Jude | April 10, 2008, 3:06pm | #
"Cracking down"
Another timeless remedy of governments that find revenues failing in the face of rising tax rates is to increase the numbers and powers of the tax collectors. Invariably, this method further reduces the flow of revenues to the treasury. Yet even with a thousand-year history of failure, the policy of "cracking down" on tax evasion remains a favorite of modern governments. Here is Adam Smith, in The Wealth of Nations, on why such policies are doomed from the start:
"Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state. A tax may either take out or keep out of the pockets of the people a great deal more than it brings into the public treasury in the four following ways.
"First, the levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax, and whose perquisites may impose another additional tax upon the people.
"Secondly, it may obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them to do so.
"Thirdly, by the forfeitures and other penalties which these unfortunate individuals incur who attempt unsuccessfully to evade the tax, it may frequently ruin them, and thereby put an end to the benefit which the community might have received from the employment of their capitals. An injudicious tax offers a great temptation to smuggling. But the penalties of smuggling must rise in proportion to the temptation. The law, contrary to all the ordinary principles of justice, first creates the temptation, and then punishes those who yield to it; and it commonly enhances the punishment too in proportion to the very circumstances which ought certainly to alleviate it, the temptation to commit the crime.
"Fourthly, by subjecting the people to the frequent visits and odious examination of the tax-gatherers, it may expose them to much unnecessary trouble, vexation, and oppression; and though vexation is not, strictly speaking, expense, it is certainly equivalent to the expense at which every man would be willing to redeem himself from it."
Adam Smith's point about smuggling may now seem obscure. After all, smuggling was something that went on in the 18th century, wasn't it? Consider the following excerpts from a recent editorial in The Wall Street Journal, which urged New York State and New York City to reduce their combined cigarette tax from 26¢ to 10¢ a pack:
Through our browsings in the United States Tobacco journal we have learned of estimates that half the cigarettes smoked in New York City are smuggled in from North Carolina, where the tax is 2¢ a pack. State Senator Roy M. Goodman, a Manhattan Republican, says the state and city are losing $93 million a year in this fashion. The smugglers load 40-foot trailers with 60,000 cartons purchased legally at $2.40 each and peddle them in the city via the organized crime network for $3.75, which is $1.25 or more below legitimate retail.
Mr. Goodman recommends a one-year suspension of the city's 8¢-a-pack tax in order to break up the smuggling, plus an increase in the state enforcement field staff to 250 from the current 50, plus five years in jail for anyone caught smuggling 20,000 cartons or more. Last year only nine smugglers were jailed, each for a few months, with the common penalty $10 or $15.
If Mr. Goodman's solution were adopted, at the end of the year the smugglers would be back, and the state would have a bigger bureaucracy. More smugglers would be caught, more judges and bailiffs and clerks would have to be hired, more jails would have to be built and more jailers hired. The wives and children of the jailed smugglers would go on welfare.
Cutting the tax to 10¢ avoids all that. It immediately becomes uneconomic to smuggle. The enforcement staff of 50 can be assigned to more useful work, the state saving $1 million on that count alone. The courts would be less clogged with agents and smugglers, and the taxpayers would save court costs, as well as the costs of confining convicted smugglers and caring for their families.
The state and city would appear to face a loss of $50 million or $60 million in revenues, but of course smokers would now buy their cigarettes through legitimate channels and the 10¢ a pack would yield about as much in revenues as 26¢ a pack yields now. But that's not all. Legitimate dealers would double their cigarette sales, earning higher business profits and personal income that the city and state then taxes.
And don't forget the impact on the millions of cigarette smokers who would save 16¢ a pack. At a pack a day, that's $58.40 per year. At average marginal tax rates, a smoker has to earn more than $80 before Federal, state, and city taxes are deducted to get that amount. He can thus maintain his or her standard of living on $80 less in gross wage demands per year, which means it becomes economic for the marginal employer to do business in New York, increasing the number of jobs of all varieties and reducing cost and tax pressure on social services.
Among other benefits, the industrious smugglers would have to find legitimate employment. It might be argued that they would he thrown on the welfare rolls. But it we know New York City, they are already on the welfare rolls, and would be forced to get off once they have visible jobs.
The Finance Office of New York City, unwilling to take the advice of either Adam Smith or The Wall Street Journal, simply rejected the idea that lowering rates would produce expanded revenues. But Adam Smith's advice was not even taken in England at the time he tendered it. The theory was not tested until 1827, and then only by accident, by an Act of Parliament. Oddly enough, the incident in question involved tobacco smuggling. Stephen Dowell gives the following account in A History of Taxation and Taxes in England: "The consumption of tobacco had failed to increase in proportion to the increase in the population. A curious circumstance had happened as regards the duty on tobacco. In effecting the statutory rearrangement of the duties in the previous year, the draughtsman of the Bill, in error, allowed one fourth of the duty to lapse in July. Unconsciously he had accomplished a master stroke, for his reduction in the duty was followed by a decrease in smuggling so considerable as to induce [Chancellor of the Exchequer] Robinson to allow his [budget] surplus, estimated at about £700,000, to go to continue the reduction thus unconsciously effected."
