High Cigarette Excise Tax in NYC Results in Flourishing Black Market

When it comes to cigarettes, taxation as a means of social engineering only benefits the black market. So said National Association of Convenience Stores (NACS) Senior Vice President, Lyle Beckwith in a USA Today Op-Ed.

The latest statistics seem to bear this out. The Huffinton Post, in a report Sunday, quoted the New York City Finance Department saying that of the 1,105 licensed tobacco retailers inspected by New York City's sheriff last year, 586 had cigarettes in their inventories that had been purchased on the black market.

On the one hand, research has shown that the more cigarettes cost, the fewer people buy them. As a result, six states are currently considering proposals to hike tobacco taxes. They are Minnesota, Massachusetts, Vermont, Maine, California, and Connecticut. President Barack Obama has also proposed an increase in the federal tobacco tax.

On the other hand, Beckwith says, as taxes go up, the black market flourishes. Black market tobacco products come from a variety of sources including low tax states, like Virginia, where the tax is only 30 cents per pack, to Native American reservations, to counterfeit product smuggled in from overseas.

The burgeoning black market in cigarettes and other tobacco products in high tax states is exacerbated by weak and ineffective fines when lawbreakers are caught. The current fine in NYC, of around $150 per carton is simply considered the “cost of doing business” according to Finance Commissioner, David Frankel.

In addition, inspections of licensed retailers don’t really get to the root of the problem, according to Jim Calvin, President of the New York Association of Convenience Stores. Calvin told the Huffington Post he thought infractions by licensed retailers were few, compared to bootleggers who sell out of backpacks, apartments and the trunks of their cars.

At the end of the day, it’s really all about the money. Combined city and state tax in NYC is $5.85 per pack of cigarettes. The difference between that and the $.30 a pack tax on cigarettes from Virginia represents a lot of profit to dishonest convenience store owners and bootleggers alike.

Beckwith and fellow NACS members say the real solution lies with programs like “We Card,” designed to curb underage tobacco use, and not with increased excise taxes. They point to data from the Substance Abuse and Mental Health Services Administration showing that thanks to efforts like “We Card,” cigarette use by 12 to 17-year-olds has declined to 8.7 percent — the lowest level in a generation.

In general, when excise taxes go up and enforcement increases, tobacco producers and cigarette manufacturers, such as Reynolds American Inc. RAI, Philip Morris PM, andAltria Group Inc. MO may suffer from decreased sales.

A recent survey conducted by Wells Fargo & Company WFC, according to Vape Ranks, points to a variety of factors, including higher cigarette taxes, growth of the electronic cigarettes market, increased gas prices and the payroll tax increase as among factors responsible for an accelerated decline of tobacco cigarette sales in Q1 2013.

As of this writing, Jim Probasco held no position in any mentioned securities.