Taxes

Where Have New Jersey's Smokers Gone?

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In an Asbury Park Press op-ed piece, Gregg Edwards, president of New Jersey's Center for Policy Research, argues that the state's cigarette tax—at $2.57½ a pack, the highest in the country—has reached a "tipping point" where a higher rate no longer brings in more money. In fact, he notes, the latest increase in the tax was followed by a reduction in revenue, from $787 million in fiscal year 2006 to $764 million in fiscal year 2007. The decrease in cigarette purchases is partly due to smokers who cut back or quit (an avowed goal of higher cigarette taxes), but Edwards notes that many smokers may be getting cigarettes online, in neighboring states with lower tax rates (cigarette sales in Delaware are mysteriously on the rise), or from the black market. The differential between New Jersey's tax and other states' is a smuggler's dream. Imagine what you could make by hauling a truckload of cigarettes from, say, South Carolina, where the tax is 7 cents a pack.

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  1. Smokey and the Bandit IV: Smoke ’em If Ya Got ’em

  2. In fact, he notes, the latest increase in the tax was followed by a reduction in revenue, from $787 million in fiscal year 2006 to $764 million in fiscal year 2007.

    Sounds like a Laffer Curve to me.

  3. Every time I go back to visit my family in Jersey , I’m under orders to haul up at least 10 cartons from Virginia.

  4. The ‘gray market’ for cigarettes has been very profitable. The mob and terrorists, who traditionally have monopolized cross-state cig smuggling, now have to compete with a cottage industry of ordinary Joe Camels making their own trip down south.

    Yet another example of the ever-present Law of Unintended Consequences.

  5. Once thing I’ve noticed since I moved to South Carolina is that, in many of the grocery stores down here, they keep all of the tobacco products within easy reach at most of the check-out lanes. You don’t have to ask anyone to get them for you if you smoke or dip.

    It’s a small thing but I never saw it on the west coast. In Washington state all the cigarettes and chew are kept behind the customer service counter, sometimes in a locked case.

    I guess that didn’t really have anything to do with the post. I just saw South Carolina mentioned and that thought came to mind.

  6. Jim Bob,

    Interesting observation. I’d never really given it too much thought, but why are ciggies always behind the counter? Is it just to obviate shoplifting, or is their a legal/deterrent thing going on?

  7. I dunno. I’m a born and bred New Jersey resident and I see plenty of smokers. Maybe it’s all the dirty, white-trash, Jersey-shore bars I hang out in?

  8. Holy crap, what a surprise. Lower taxes bring in more revenue. I would be shocked if this weren’t a widely know and easily demonstrable fact, as it occured when both Reagan and Bush signed large tax increases into law. Kind of defeats the tax and spend arguments that seem to be so popular in Washington now.

  9. “Is it just to obviate shoplifting, or is their a legal/deterrent thing going on?”

    I am pretty certain it is mandated by law. I have lived in several states, and all of them mandated this policy.

  10. Cerro,

    In Washington state, at least, I think the reason was a law designed (ostensibly) to prevent kids from swiping smokes. I couldn’t say why SC does things the way it does; possibly there is no law and some stores choose customer convenience (not all of them do; Publix, for example, does not).

  11. In Delaware, there’s a tobacco aisle in a lot of the supermarkets, especially Food Lion. In light of the “Writing About Things on the Internet Is a Crime” thread, is Mr. Sullum now party to conspiracy to bootleg cigarettes? Hmmmmmmm?

  12. If a tax is designed to discouage consumption than bringing in lower revenue is a good thing not a bad thing.

    Also keep in mind that the average person starts smoking in their teens, who are very price sensitive as consumers thus a high price will greatly discourage people to not smoke in the first place. Once a person is in their twenties and has the disposable income to afford five dollars a pack smokes they should hopefully be smart enough not to start.

    Finally, If I were a state government although I would be slightly concerned with mob/terrorists smuggling smokes to pay for criminal activity, I would not be concerned at all about average consumers ordering smokes from out state, why? Because the purpose of the law is to discourage people from starting to smoke as teens. Your average fifteen year old is not going to order marlboroughs from the nearest Indian tribe with a credit card and have them delivered to the house.

    Regards

    Joe Dokes

  13. I, for one, welcome my new cigar rolling overlords. Really, I switched to cigars. Much cheaper.

    The more important question is… Don’t all ‘sin’ taxes create a conflict of interest? It is now in the State of NJ’s interest to create/keep more smokers.

  14. “Also keep in mind that the average person starts smoking in their teens, who are very price sensitive as consumers thus a high price will greatly discourage people to not smoke”

    Forgive me if I’m wrong, but shouldn’t the laws in place prohibiting underage smoking be discouraging teens from smoking, rather than regressive taxes that penalize adults using a lawful product.

  15. Goldthwait,

    “Forgive me if I’m wrong, but shouldn’t the laws in place prohibiting underage smoking be discouraging teens from smoking, rather than regressive taxes that penalize adults using a lawful product.”

    Yes, and as all of us hear on the Reason Boards know prohibitions are at best ineffectual and at worst counter productive.

    Best to think of it in terms of beer. When I was a teenager getting beer was not much of a problem. I had an older brother and friends of mine had older brothers who would buy us beer. But, we had to PAY for it and frequently a carrying fee. Thus, we were consumers of beer and like all consumers price played a roll thus we frequently drank crap like “Lucky Lager,” “Mickey’s Big Mouth,” or “Strohs.”

    The same economics holds true for cigs. Raise the price and you raise the opportunity cost. The higher the opportunity cost, the less demand. I would argue that while high cig taxes do penalize those of legal smoking age, the net effect is that young people will more frequently spend their disposable income on something else rather than become addicted to nicotine. Finally, I remember watching people bum smokes from each other as a child. Smokes have become expensive enough that most people won’t give out or beg for smokes any longer. Thus, cutting down on the “free samples” that help get young people hooked.

    Regards

    Joe Dokes

  16. Joe Dokes –

    Since you admit that there’s no way to stop minors from smoking aside from making it too expensive for them, wouldn’t the optimal policy be to legalize tobacco and cigarettes for minors, but apply a heavy tax for those under 18 and 21, respectively? This way, you don’t have to punish adults and its still more expensive for minors.

  17. Sounds like a Laffer Curve to me.

    Yeah, ‘cept no one’s laffing very much.

  18. the net effect is that young people will more frequently spend their disposable income on something else rather than become addicted to nicotine.

    That’s one effect. That’s not what “net” means.

  19. Arthur Laffer was an advisor to Reagan, but his VP, Dubya’s daddy was too dumb to grasp the curve.
    “Voodoo econonics”
    Needless to say, Dubya is dumber squared.

    And here we are.
    Did any Reasonoid vote for Dubya?

    Stop voting already! Acknowledge where you’re sending us!

    (I had a wonderful one-on-one intellectual encounter with Arthur many years ago when he happened to be passing through Sinincincinnati.)

  20. When I was a teenager getting beer was not much of a problem.

    Getting beer was not at all easy when I was a teenager. Getting weed, coke, shrooms, acid, mesc, E, PCP, etc…that was a piece of cake. Dealers didn’t card.

  21. Jacob:

    The differential between New Jersey’s tax and other states’ is a smuggler’s dream.

    Yep, yet another example of government interfering with capitalism and engendering “criminal” activity.

  22. R.J.-

    My experience also. The easiest drug for me to get in high school was weed. Then nicotine, then beer. Pretty messed up huh?

    (P.S. DEA, TSA, or INS, if you are reading this, fuck off.)

  23. Smoking laws are bullshit in this state. In the case of my friend, a letter today from the treasury says she owes about $260 for her last two years of smoking, while she has ordered them online from out of state for the last two years. She argues that they were from an “Indian reservation” which I didn’t know mattered in the case of the state taxing them in the first place–I thought that the fact that they’re not from the state in the first place would be enough of a reason for no taxes.

    New Jersey is too fucking liberal for its own good. Smoking is barred from all restaurants, too, which makes no sense economically, but then I remember: liberals.

  24. Hauling cigarettes from SC huh? And here I am unhappy with my current job. Hmmmm. . .

    Smuggling sounds so dirty, but you know when I read a good history on America or Europe and see how much smugglers actually helped the larger cause for liberty, . . . well, smuggling actually takes on a noble air.

  25. I’m pleased to report that my 81 year-old mother still drives from suburban Philly to Delaware about 4 time a year to buy a few cases of booze, just as she has for the last 40 or so years. PA has state run liquor stores with high taxes.

    On the topic of cigs, does anyone else remember the Ladero machine …

    http://www.ryomagazine.com/january/index.htm

    I think it might make a come-back.

  26. All the NJ smokers are standing outside my office door right now.

    The depressing thing (I don’t smoke so I don’t really care about smoking per se) is how many allegedly “small gov’t” people “don’t mind” the cigarette restrictions because they don’t smoke and don’t want others to do so in “their” restaurant or bar !!! Oy.

  27. Because the purpose of the law is to discourage people from starting to smoke as teens.

    Yeah, and all that tax money rolling into the coffers is just an accidental side-effect.

  28. Holy crap, what a surprise. Lower taxes bring in more revenue.

    If this was true, why don’t the states with the lowest taxes bring in the most revenue?

  29. If this was true, why don’t the states with the lowest taxes bring in the most revenue?

    Yeah! Why not cut taxes to zero and get infinite revenue??

  30. Yeah! Why not cut taxes to zero and get infinite revenue??

    Dan T. and Rhywun, let me give you a remedial course in the Laffer curve.

    The Laffer curve is basically an upside down ‘U’ with the X axis being the tax rate and the Y axis being the amount of revenue collected. It originally was used to describe income tax rates, but the principle applies to any other kind of tax.

    At two point on the Laffer curve you will receive 0% in tax revenues. If your tax rate is 0%, obviously you would receive $0 in tax revenue.

    If the tax rate were 100%, no one would work since 100% of their earnings would be taken by the government.

    Now, as you increase the tax rate from 0%, you will get increasing revenues. But at some point on the Laffer curve, when the tax rate gets higher and higher, people will be disinclined to work and will either drop out of the labor market or resort to cheating and start hiding their income.

    This point of the Laffer curve is the highest point of the U. Any furthur increases of the tax rate will bring in decreasing revenues.

    A tax rate of $2.57 per pack vs $0.07 per pack creates a powerful incentive to make a trip outside of NJ. I don’t know how many packs are in a carton? How much money could one make if the filled up their mini-van with cartons of cheap smokes from SC?

  31. Ray G – The downside is having to go to SC.

    Smuggling’s always been a noble profession – look at Mal and Han. Speaking of which, some good news/bad news. The bad news is that Firefly isn’t in the top one-hundred DVD sales on Amazon anymore. The good news is that Serenity Special Edition is number 7.

    Seriously, ‘Versal and Fox (production, not broadcast) totally have to have made their money off this.

  32. Senor Kurt, I believe that Rhywun was making a funny.

  33. Senor Kurt, I believe that Rhywun was making a funny.

    S?.

    I don’t know how many packs are in a carton?

    10. That’s a $25 profit per carton. Nice!

  34. 10. That’s a $25 profit per carton. Nice!

    Hmm. Let’s see. In my Durango, I think I could put a stack of cartons 5 long by 15 wide by 10 high = 750 cartons.

    Assuming I sell the cartons at $15 profit each means I make $11250. Not bad for a weekends work.

    Too bad I live in Illinois.

  35. I live in Joisey. I was over the border in PA last weekend, and the bars are full of smoke. Maybe they drive across the border to smoke in a bar?

    Outdoor flea markets also seem to be a place where smokers can still work.

    But if the state is dependent upon revenue, and the tax is having its purported effect of reducing smoking, there is an obvious solution.
    We tell kids not to have pre-marital sex, but we know they will anyway, so we give them condoms. We tell them not to use needle drugs, but we know they will anyway, so we give them safer needles. Why not give third graders low tar smokes? Get them hooked on something healthier than Lucky Strikes no filters. We know they are going to anyway…

  36. If this was true, why don’t the states with the lowest taxes bring in the most revenue?

    Math.

    States with lower taxes tend to also have low populations. Thus total revenues will be lower than they will be with a high population, high tax state.

    Anyone with a cursory familiarity with tax policy knows there’s this curve thingy which will tell you at some point, lower taxes too much, revenue goes down. Raise them too much, revenues go down. But lowering them is the safter bet because economic activity will usually expand, leading to a higher number of taxable transactions, thus leading to higher revenues. But sometimes pols don’t want to wait for that to happen.

  37. States with lower taxes tend to also have low populations

    Texas is the second largest state. Florida is fourth. Neither of them have an income tax at all.

  38. Texas is the second largest state. Florida is fourth. Neither of them have an income tax at all.

    Which is not to say that Texas and Florida have no taxes at all. I pay a shitload of state and local taxes here in Texas. The only way to avoid taxes in Texas is to not buy anything and not own anything.

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