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NY cigarette taxes drive growing underground market

Experts weigh in on the millions the City loses on untaxed cigs.
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The price of New York cigarettes are the highest in the country.

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Illegal cigarette sales represent close to a third of New York's tobacco market.

"It's a problem everywhere but it's a big problem in New York," said Scott Drenkard, an economist and spokesman for the Tax Foundation, a Washington D.C.-based nonpartisan think tank that researches national and local tax policies.

In the wake of the killing of Staten Island man Eric Garner – who had been detained by police on suspicion of selling "loosies" on the street – Metro looked into this underground market, its impact on the City’s economy and why law enforcement pursue and arrest people for possession and illegal sale of untaxed cigarettes. Police had arrested Garner previously for possession with intent to sell “loosies."

The illegal sale of loosies and out-of-state cigarettes in New York is defined as "tax-caused phenomenon," according to a report by the Tax Foundation. In 2002 New York City implemented an additional tax of $1.50 per pack, that increase was followed another in 2010 when New York state increased its cigarette tax to $4.35 per pack.

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That encouraged store owners and street vendors to evade taxes and profit by traveling to Virginia and North Carolina to buy cigarettes at lower costs ($5.25 and $5.45, respectively) and transport the product for sale in New York.

Drenkard likens the process to the bootlegging of alcohol in the Prohibition Era.

According to Julie Anna Golebiewski, a spokesperson for the Independent Budget Office, a nonpartisan city finance watchdog group, the smuggling of untaxed cigarettes costs the City tens of millions of dollars.

"Assuming the smuggling rate in the city was the same as the state, the FY 2013 cigarette tax collections were $79.9 million less than they would have been if all cigarettes were taxed,” Golebiewski told Metro. “That is, if all cigarettes were taxed, cigarette tax collections would have been $140.5 million, instead of the actual $60.6 million.”

On Tuesday, the City moved forward with a federal lawsuit against Discount Tobacco and Things, a Woodbridge, Virginia-based tobacco shop officials believe sold thousands of cartons of cigarettes for illegal resale in New York City. Still, for many tobacco bootleggers, New York represents an ideal arbitrage market for tobacco sales.

“There's a profit motive there," said Drenkard. "There's this huge tax distortion. Two hundred percent of the price of the product is the level of the tax, once you factor in state, federal and local taxes. That distortion makes it so all this activity is illegal."

In Brownsville, one of Brooklyn's lower income neighborhoods, stores selling illegal loosies could be found every three blocks, though vendors like Garner who sold smokes on the street were nowhere to be found.

One middle-aged man donning a trucker hat and denim coat admitted to driving down from New Hampshire with a few cartons of Pall Malls, but said he would never sell loosies on the street. "I don't want to be choked!” he exclaimed.

Selling untaxed cigarettes is classified as a Class E felony in New York state. In January, the City passed legislation which imposed fines of up to $2,000 for a first violation and up to $5,000 for a second violation of selling untaxed cigarettes. Three violations could lead to the forced closure of a store.

A shop owner who asked to not be identified said he stills sells loosies because the people in his neighborhood simply do not have the means to buy packs for $14.50.

"Most of the customers come with no money," he said, while charging a customer 50-cents for a loose Newport.

By selling a whole pack of loosies, the shop owner would go on to make $10, $4.50 less than than the cost of a standard New York pack but twice as much as a pack of untaxed Virginia cigarettes.

"It's better than buying a pack all at once," said Patrick Jones, one local customer who picked up a loosie before heading to work. "The prices of taxes in New York City are insane for cigarettes. It's just better to buy [loosies] here and there as you go instead of buying packs."

The Tax Foundation's Drenkard said New York City legislators may not be taking into account the personal and financial realities of its citizens when imposing such high cigarette taxes in an effort to get people to stop smoking.

"You have to ask at some point: do we really want to use the tax code, which is supposed to be about generating revenue, to influence personal decisions?" asked Drenkard "Is that an appropriate use of that policy tool? I don't think it is."

As for the future of bootlegging and loosie sales in the City in the wake of Garner's death, the NYPD declined to comment on its approach to combating the phenomenon.

"They'll probably put a stop to it completely and taxes will go up for all of us," said Jones.

 
 
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