A new study released by the Tax Foundation shows that over 60 percent of cigarettes are smuggled in to New York to avoid the state’s high cigarette taxes.
The smuggled cigarettes are usually transported from states with lower taxes on cigarettes.
New York State has some of the highest cigarette taxes in the nation with a tax rate in new York City currently at $5.85 cents per pack. The state rate is $4.35 per pack.
There are a number of policy lessons to learn from this example.
First, prohibition doesn’t work. There are a lot of people who have a lot of confidence in the government’s ability to manipulate behavior through taxes, regulations, mandates and bans. But markets are dynamic, and laws are static. Where there is demand, there will be supply. We should have learned this lesson after alcohol prohibition, but we haven’t.
Second, the government’s ability to tax is finite. Once you raise taxes beyond a certain point, people start to act to avoid them by exploiting loopholes, both legal and illegal, and/or moving away from them.
This is why, historically speaking, the federal government has only ever been able to collect about 16 – 18% of GDP in tax revenues no matter how many taxes they levy, and how how tax rates go.
Again, once you raise taxes to a certain level, people start to avoid those taxes.