The Laffer Curve

New York has found itself sliding down the backside of the Laffer Curve on cigarettes.

The state’s tax collectors were recently calling around to convenience-store owners, wondering what was up. The $130 million in extra tax that Albany was expecting from a change in the law about cigarette sales on Indian reservations wasn’t happening.

A memo sent to members of the New York Association of Convenience Stores from the group’s president, Jim Calvin â€” a copy of which I have on my desk — said, “I got a call from Gov. Cuomo‘s budget office yesterday. In examining cigarette tax receipts so far this fiscal year (April 1 to March 31) it looks like they will fall considerably short of their projection in new revenues. . . .”

The state had hoped to get the extra dough by enforcing a new law that made it illegal for licensed cigarette wholesalers in the state to sell untaxed name-brand cigarettes like Newport and Marlboro to Indian reservations.

The reservation store would sell the cigarettes to non-Indian customers who were trying to avoid the hefty taxes imposed by the state. The state and legitimate sellers of cigarettes were both hurt.

This isn’t their first time going over the tip.  This is a continued sliding.  The point where they thought Indian Reservation sales were a problem is when they were already on the right side.  This is just a continued fall as they continue to raise the rate.

So how does the Laffer Curve work?  It’s actually pretty common sense.  You can raise more government revenue by raising the tax rate — for a while.  Eventually you end up at the point where you stop making more money, because people either stop doing the thing you are taxing, or they start finding ways — legal or illegal — to get around your tax.  Both of these are happening in NY.  People are stopping smoking because it is too expensive, and people are going to get untaxed cigarettes from the Indian reservations.

So how much extra did the state collect in tax with the law change?

The state Department of Taxation did not return a call for comment.

But according to Calvin’s memo, “Cuomo’s budget office” was saying that cigarette tax revenues were flat this past October and November with the year before.

The rate went up — and revenue did not.  That’s the Laffer Curve.  A lot of people just flat stop smoking at $11 a pack.  A lot more, the ones with cars, will start going to a place where they are significantly cheaper — like Indian reservations where they can get them for half that price.  Illegal?  So what.  For a pack a day smoker, that’s a $150 a month in just taxes.  That’s enough to evade, especially when it is as easy as getting in the car.

Not only that, but this sort of exorbitant tax helps organized crime.  The Mafia already did a decent amount of business bootlegging untaxed stolen cigarettes or less-taxed cigarettes from other states.  The more the price goes up, the less repulsive the risk that comes with Mafia smuggled, cheaper cigarettes becomes.  So, while the state loses money, they put more money in the pockets of murdering mobsters.

We’re going to see a lot more of this.

It’ll also be interesting to see if recent toll hikes on the Port Authority roads, tunnels and bridges actually do what New Jersey and New York hope they do — raise revenue.

I see a lot fewer cars on the roads and at the Hudson River crossings, and more people on trains. The outrageous cost of gas is also contributing to this lifestyle change.

That’s great for the environment, of course. But the Port Authority wasn’t being ecology-minded when it instituted the increases. It was hoping the hikes would bring in more dough.

And I don’t think that’s happening.

Me neither.

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