State sees revenue rise since cigarette tax hike

Thursday, December 16, 2010
by Jason Subik
Daily Gazette

CAPITOL — State taxes collected on the sale of cigarettes and other tobacco products increased during the third quarter, after a major tax hike, despite retailers’ claims that sales have dropped during the same period.

The tax increase on cigarettes went into effect July 1, increasing taxes from $2.75 to $4.35 and increasing the cost of cigarettes from about $7.60 to $9.20 per pack. The tax increase made New York state the most expensive place to smoke in the U.S. and sparked a debate over whether the increase would help or hurt state revenues, curb smoking or increase black market and Indian reservation tobacco sales.

So far, the tax increase hasn’t hurt state revenues. New York state took in $423.5 million in taxes from the sale of cigarettes and tobacco products during the third quarter, up 12.31 percent from $377 million during the third quarter of 2009.

Tax receipts from just cigarettes jumped 23.36 percent from $348.4 million during the third quarter of 2009 to $429.8 million for July, August and September of 2010.

The tax rate on cigars and other tobacco products didn’t increase until Aug. 1, when it was increased from 46 percent to 75 percent of the wholesale price. Little cigars increased from being taxed at the wholesale rate to the same retail rate as cigarettes, and the tax rate on snuff increased from 96 cents to $2 per ounce.

The tax increase on tobacco products generated a huge spike in year-over-year tax revenues for the month of August, but then the increase diminished in September. The state collected $14.9 million in taxes for tobacco products in August, up 183.6 percent from the $5.3 million collected in August 2009. In September, the state collected $6.4 million, up only 3.1 percent from $6.2 million in September 2009.

Exactly how much the taxes have affected the sales of tobacco products is unknown. Many retailers report decreased sales, but it’s also possible many tobacco users are evading the taxes by purchasing products on Indian reservations. The state tried to levy the same taxes against Indian retailers but was blocked earlier this month by a federal Court of Appeals ruling. There are still appeals pending on both sides of the complex issue, which involves treaties and the sovereignty of the Indian nations.

New York State Association of Convenience Stores President James Calvin said his members have been hurt by the taxes Indian retailers have been able to avoid.

“It’s not a scientific survey, but our members around the state, on average, lost 25 to 35 percent of their cigarette sales immediately after the tax increase took place. Anybody who thinks 25 percent of the smokers quit smoking overnight is in la-la land,” Calvin said. “This is clearly a case of smokers quitting our stores and going to a lower-tax state or a no-tax venue like Indian reservations or the black market.”

Erik Kriss, a spokesman for the state Division of the Budget, said the Paterson administration anticipated the tax increase would reduce smoking by 22 percent and increase state revenues. He said so far the revenues appear to be meeting projections even though the effect on smoking is unknown.

“We anticipated a drop-off in sales; that was the whole point of doing this. Yes, it does raise some revenue for the state and we need that, but the bigger point is that smoking is bad for your health and if we can provide an incentive for people to quit and be healthier and cost society less money in health care, all the better,” he said. “Are some going to the Indian reservations or the black market? I’m sure they are, but it would be a leap to suggest there is as much smoking going on now as before.”

Kriss said the state expects to get $260 million more from taxes on cigarettes and tobacco products for 2010 than it did in 2009. He said the administration also anticipated getting $110 million in taxes from Indian tobacco retailers until the courts blocked collection of the taxes.

Some convenience stores around the state have cut staff or reduced hours in the wake of the tobacco tax increase. Amherst-based Wilson Farms announced in November that it would lay off 20 employees, reduce hours at the company’s stores by 10 percent and reduce planned capital spending for 2011. The company blamed the tax increase for the cutbacks.

Calvin said his members report that convenience stores closest to Indian reservations have suffered the most from tax increases.

Tom Mailey, the marketing manager for Stewart’s Shops, said cigarette and tobacco sales at Stewart’s have dropped by about 15 percent in New York since the increase. He said sales at Stewart’s stores located in Vermont have increased, but he didn’t have an estimate on how much.

“In Vermont they have a pricing advantage without the tax. As far as impact to our overall business, it hasn’t been that big because we aren’t a big carton seller. We’re packs more than anything, so that sort of minimizes this,” he said.

Cumberland Farms Inc. would not release precise data on its sales numbers or whether there have been any layoffs for local stores. Cumberland Farms Senior Tobacco Manager Anne Flint said sales have declined since the tax increase.

“But we are trying to minimize the declines by offering cigarettes at state minimum price,” she said.