US: NY has Nation''s Highest Cigarette Tax; Why Do So Few Pay It?

Source from:  Syracuse.com 12/14/2015

The number of state-taxed cigarette packs sold in New York has plummeted by 54 percent in the past decade.

That's far outpacing the 19 percent decline in New Yorkers who have quit smoking over the same time.

Instead, more smokers are buying cigarettes in ways that avoid New York's $4.35 per pack tax, the highest in the nation. They cross state lines, shop from black market vendors and travel to Native American outlets to save $6 per pack or more, experts say.

New York is losing big. In the past five years, the state's cigarette tax collections have dropped by about $400 million, according to data and estimates from the office of state Comptroller Thomas DiNapoli.

Consider: A pack of Marlboro Reds bought in the town of Onondaga recently cost $10.58. That includes a state tax of $4.35 per pack, a federal excise tax of $1.01 per pack, and 8 percent sales tax of 78 cents.

Just down Route 11, the Onondaga Nation runs a small tobacco store with a 24-hour drive-through. There, a pack of Senecas costs just $4. That likely includes that $1.01 federal excise tax, according to several experts.

That's a savings of $6.58 per pack.

Those off-the-tax-grid shopping options add up to as much as $1.3 billion in uncollected state cigarette taxes each year, according to a study by the National Academies of Sciences, Engineering, and Medicine.

That's enough money to pay the state's annual costs to run the New York State Police, the Department of Environmental Conservation and its public health care agencies.

If everyone who bought cheaper cigarettes in New York had to pay the state's tax, "it would certainly be a huge, huge increase," said Mathew Farrelly, senior director of the Public Health Policy Research Program at RTI International and one of the authors of the national academies' study. "Price really matters for smokers."

New York isn't the only state seeing this change in smokers' shopping habits or in tax collections. About 35 percent of smokers in Oklahoma buy cigarettes in ways that avoid state taxes, compared with about one-third of smokers in New York who do the same, experts said.

"This is not a new phenomenon," said Joe Heath, a lawyer for the Onondaga Nation.

But a couple of things have changed in recent years in New York that could spell continued decline in tax collections and the sales of cheaper cigarettes.

One, a federal court in 2011 ruled in the state's favor and paved the way for Gov. Andrew Cuomo to try to collect the state tax from Native American nations by making their wholesalers pick up the cost. Instead, many nations abandoned the wholesale route and stopped selling name-brand cigarettes. They began stocking their stores with significantly cheaper ones made by Indian-owned manufacturers, experts said, like Seneca-brand cigarettes.

Two, the illegal trade of cigarettes has grown, especially in New York City where smokers are supposed to pay an extra $1.50 per pack on top of the state tax. A recent study by New York University estimated as many as 15 percent of New York City cigarettes sales avoided the state tax.

"It is a pervasive problem that goes far beyond the borders of Indian reservations," says Jim Calvin, president of the New York Association of Convenience Stores.

New York increased its tax on cigarettes to $4.35 per pack in the spring of 2010. In the next 12 months, revenues increased by $250 million, about an 18 percent increase to $1.6 billion.

Since then, those revenues have steadily declined. This year, the state is expecting to collect $1.2 billion on cigarette taxes, according to DiNapoli's office.

"When you raise a tax on something and end up with less revenue, it's time for some soul searching," said Scott Drenkard of the Tax Foundation, a non-partisan group in Washington that studies tax policy.

Those high taxes are meant to discourage people from smoking. But they extra cost can also encourage smokers to look for better deals, some say. A study by the Mackinac Center for Public Policy in Michigan named New York the No. 1 state when it comes to smokers avoiding taxes.

A Census survey from five years ago showed that about 3 percent of New York's smokers bought their last pack of cigarettes out of state, according to Donald Kenkel, an economist at Cornell University.

That same survey showed that 13 percent of New Yorkers bought their last pack at a Native American-run store.

Tribes operate hundreds of outlets around the state, according to Calvin, from sales in residential homes to the Sav-On stores run by the Oneida Indian Nation. Cigarettes sold at those locations don't carry the state cigarette tax stamp - and therefore don't collect $4.35 per pack for the state.

It's a little harder to tell whether Native American-owned manufacturers of cigarettes are paying the federal tax of $1.01 per pack. Most interviewed for this story thought they were, though the U.S. Treasury Department won't release data on individual taxpayers.

Those $4 Seneca cigarettes are actually made in Canada by Grand River Enterprises, which operates on the Six Nations of the Grand River Indian territory in Ontario. A lawyer for Grand River said this week that federal excise tax is paid for by the importer who brings the cigarettes into the United States.

Two years ago, Attorney General Eric Schneiderman brought a lawsuit against Grand River to try to stem the flow of untaxed and unregulated cigarettes coming into New York from Canada. So far, that lawsuit has stalled.

Will New York try any other means to add taxes to those $4 cigarettes? Kenkel, the economist at Cornell, thinks it's not likely.

"Taking that revenue stream away from the Indians to balance the New York budget? It's not a good idea," he said.

Instead, Kenkel thinks the state would have better luck negotiating agreements with each tribe that could, at the very least, make all cigarettes a similar price.

That's what happened with the Oneida Indian Nation.

Two years ago, the Oneida Nation struck a deal with the state to end a long-standing land claims fight, share gaming revenue and create a buffer zone around Turning Stone as Cuomo looked to expand gambling.

As a part of that, the Oneidas agreed to start adding $4.35 per pack to the national name-brand cigarettes sold at Sav-Ons and Turning Stone.

That levels the prices when compared with cigarettes sold at other convenience stores, something Calvin's organization likes.

The agreement also allows the Oneida Nation to keep that extra $4.35 per pack. That money is not remitted to the state. Enditem