In last week’s class, the topic of black market cigarettes was briefly discussed. Our textbook also addresses the topic in a short article on pages 394-395. In this blog post I want to expand on information concerning sales tax on cigarette and its effect on black market trade.
A great resource to consult is the research completed by The Center for Public Integrity an organization that does investigative journalism and has completed reports on a wide variety of issues including the environment, sexual assault, and the Iraq war. The Center for Public Integrity finds that because of smuggling nations miss out on $40 billion of tax revenue annually. About one billion dollars of that money is solely lost in New York state, “In 2007, New York’s reservations — home to fewer than 17,000 people — sold a towering 6.4 billion cigarettes…every year, the state loses nearly $1 billion in city and state taxes from reservation sales (Willson).” The supply chain of the trade is shown in the diagram below:
To learn more about the New York cigarette black market, check out this video (Willson):
In addition to selling cigarettes to convenience stores in New York, the reservations have increased the illegal trade of cigarettes nationwide. Many Americans purchase cigarettes through websites that dodge the sales tax. The prevalence of these websites increased substantially from 88 in 2000 to 772 in 2006 with the majority of these sites being controlled by smoke shops on New York reservations (Chen). In 2008, New York passed a law that required the reservations to apply sales tax to cigarettes they sell to people not a part of the reservation. Although the trade continues, businesses have been charged with tax evasion (Hernandez).
The situation in New York leads to some interesting questions about the rate of sales tax and cigarettes. Does increasing the state’s sales tax actually lead to an overall increase in revenue or is that revenue lost to the efforts to counteract the negative consequences of an illegal market (i.e. increased policing because of gang violence)? Will additional policies to prevent smuggling effectively counteract the economic forces that drive the black market trade of tobacco? Should the government continue to use sales tax as a means to decrease cigarettes use?
Chen, Te-Ping. "SMOKE2U." The Center for Public Integrity. 19 Dec. 2008.
Hernandez, Javier C. "Illegal Indian Cigarette Sales Uncovered, Bloomberg Says." City Room. New York Times, 16 Sept. 2010.
Willson, Kate and Marina Walker Guevara. "Big Tobacco’s New York Black Market." The Center for Public Integrity. 19 Dec. 2008.