With Cigarette Taxes Sky High, More New Yorkers Than Ever Turn to the Black Market

In New York City, just one in six cigarette packs collected by researchers came through legal channels.

In 2023, New York raised its cigarette excise tax by $1.00 to $5.35 per pack. New York City imposes its own tax of $1.50 per pack, and that's before you include federal and sales taxes, making for the most expensive smokes in the country. That is, cigarettes are expensive in New York for those who pay those taxes. But state officials were warned that such a high rate would drive consumers to the black market, and that's exactly what happened. According to recent research, more New Yorkers than ever are turning to tax-evading illicit sources for their nicotine needs.

Taxes Into Good Health—or Not

When the New York excise tax was hiked, the Albany Times-Union noted, "it's the nation's highest and brings a pack of cigarettes at many retailers to about $12….Health advocates hailed the increase, saying it will lead to fewer smokers and cancer deaths. Anti-tax groups, though, predicted it will increase trafficking in illicit untaxed cigarettes in the state."

Health advocates like taxing vices on the theory that raising taxes simultaneously generates government revenue while escalating prices for allegedly bad things—like cigarettes—out of reach of many consumers. What they rarely consider is that there are other options, such as buying cigarettes smuggled from jurisdictions with lower levies.

"New York has created a cigarette-smuggling empire, and the worst is yet to come," Todd Nesbit, an economics professor at Ball State University, and Michael LaFaive, of the Mackinac Center for Public Policy, warned even before the 2023 tax increase. "It's the unavoidable consequence of the state's decadeslong history of raising the cigarette tax."

"If enacted, consumers will go across borders to do their shopping or rely on black-market suppliers," agreed the Tax Foundation's Adam Hoffer. "Tax revenues will fall, illicit activities will thrive, and law enforcement spending will need to increase."

In fact, as Nesbit, LaFaive, and Hoffer emphasized, even before the dollar-per-pack tax hike, more than half of cigarettes sold in the state of New York lacked local tax stamps and were smuggled from elsewhere. Since 2023, illicit dealers appear to have claimed even more market share.

Illicit Dealers Grow Their Market Share

Using methods used by earlier studies, last year, researchers from Rutgers University gathered discarded cigarette packs in 30 census tracts across all five of New York City's boroughs and checked them for tax stamps. They published their findings last month in BMJ Tobacco Control.

"This study found that in 2024, the percentage of littered packs bearing the proper NYC tax stamp declined to 16.6%. Georgia surpassed Virginia as the primary source of littered cigarettes. Packs with no stamp increased, rivaling Virginia as the second most common type of littered packs."

That means that only about one cigarette pack of every six gathered by the research team in New York City passed through legal channels. The others were smuggled from jurisdictions with much lower taxes, such as Georgia (37 cents per pack), Virginia (60 cents per pack), or else entirely bypassed the legal and taxed supply chain. This result could have been foreseen. It was foreseen. 

Decades of Ignored Warnings

In 2002, when New York City was considering its $1.50 per pack levy, then-Mayor Michael R. Bloomberg harumphed, "If it were totally up to me, I would raise the cigarette tax so high the revenues from it would go to zero" in the expectation that high taxes would drive smokers to quit.

But, as The New York Times reported, people with a little more savvy warned hizzoner, the nanny-stater, not to expect easy compliance from clever human beings who don't care to be socially engineered.

"Richard Lipsky, a lobbyist for the owners of small delis, bodega owners and convenience stores, predicted in an interview that many neighborhood stores would not survive the higher tax as many smokers would buy their cigarettes over the Internet, from Indian reservations, from adjoining states or from smugglers," the Times reported. 

As it turned out, many small shops did better than expected. They were willing to deal with underground wholesalers themselves and stock up on black market cigarettes that they sold to their usual customers. By 2014, city officials found smuggled cigarettes "in 48 percent of bodegas visited in recent inspections," according to a later Times story. The reason for the booming illegal trade was obvious. 

"In early 2002, the city, the state and the federal government collected a combined $15.80 in taxes on every carton of cigarettes sold here," Michael Wilson noted in that piece. "Today, that number is $68.60, or almost $7 a pack. With the increases in taxes, more packs flowed up from the South, in cars and overstuffed minivans and in the underside luggage compartments of passenger buses" to escape taxes.

The 2023 tax hike did nothing to change economic incentives for customers, for store owners, or for the smuggling networks that keep them supplied with comparatively affordable smokes. Every increase in tax raises the potential profits to be made by working outside the law to satisfy demand. Worse, in their 2023 column, Nesbit and LaFaive cautioned that those people who could be deterred from smoking by high taxes had long ago been reached, and that little more benefit could be expected. 

"The people who still buy cigarettes are dedicated smokers: Their preference for smoking overcomes the deterrent power of any levy. If these people are told to pay even more, they have a greater reason to buy smuggled cigarettes."

Unfortunately, that led to enforcement escalation. The face of that escalation is Eric Garner, who was killed in a confrontation that began when police approached him on suspicion of selling loose, untaxed cigarettes. A vice-tax policy championed by nanny-state health advocates as a means of weaning Americans from the deadly consequences of smoking proves to have deadly consequences itself.

Drop Prohibition by Another Name

Jeffrey Singer, an Arizona-based surgeon and senior fellow at the Cato Institute, has a better idea.

"Instead of chasing bootleggers, drop the tax rate," he suggests. "Jack up taxes high enough, and it's just prohibition by another name—and prohibition always delivers the same package: black markets, corruption, and violence."

That's good advice. But weaning nanny staters from their addiction to vice taxes may be harder than getting smokers to kick their nicotine habit.