Pubdate: Wed, 31 Jul 2002
Source: Wall Street Journal (US)
Contact:  2002 Dow Jones & Company, Inc.
Website: http://www.wsj.com/
Details: http://www.mapinc.org/media/487

SUPPLY-SIDE SMOKERS

New York City Mayor Mike Bloomberg has done the impossible -- he's turned 
Representative Charlie Rangel into a supply-sider. Harlem's new Arthur 
Laffer is upset about Mr. Bloomberg's new $1.50-per-pack tax on cigarettes, 
which Hizzoner hopes will bring in some revenue and encourage New Yorkers 
to kick the habit. Mr. Rangel blasted the hike as "totally unfair to tax 
poor folks."

The effects of the tax, which has raised the price of a typical pack to 
$7.50, are already careening through the local economy. Indian 
reservations, which are allowed under federal law to sell cigarettes 
tax-free, are booming with the new business. Smokers don't even have to get 
in their cars for the privilege, as the tribes now run Web sites 
exclusively dedicated to the cigarette trade. Meanwhile, many small New 
York City shops, known as bodegas, that exist on the 
coffee-bagel-and-cigarettes business are wondering whether they'll survive.

New Yorkers can appreciate a certain notoriety in having the nation's 
highest cigarette taxes for the moment, but plenty of copycats aren't far 
behind. Fifteen states increased cigarette prices this year, and California 
Governor Gray Davis is plotting his own $1.52 tax.

Mr. Davis might be wise to watch how the New York experiment works out 
first. Since 1998, when taxes across the country began to rise steeply, the 
discount brands have risen to 8% of the market from just over 2%. The 
glossy brand cigarette companies like Phillip Morris have been trying to 
sweeten the deal with special three-for-the-price-of-two deals. But it's 
unlikely that will be enough to keep customers from buying their smokes 
from discounters, on the Web or across the state line.

How lucrative this arbitrage game can become was shown by the recent 
conviction of a Charlotte, North Carolina, businessman who was running a 
cigarette smuggling ring and using the profits to help fund Hezbollah. In 
Maryland, where the $1 per pack tax is astronomically higher than the 2.5 
cents per pack in neighboring Virginia, cops have been dispatched on 
serious missions to fight smuggling operations. Shops in New York City's 
neighboring Westchester County already report seeing bulk-buying Bronxites.

Westchester politicians, for their part, have been expressing regret that 
they didn't enact a gargantuan sales tax for themselves, which everyone 
portrays as a win-win. After all, pols get the revenues and the credit for 
discouraging smoking at the same time. But what common sense suggests, 
independent and academic studies, like one from the Center for Budget and 
Policy Priorities, have begun to confirm. Highly confiscatory taxes tend to 
produce much less revenue than expected, in part because much of the taxed 
behavior simply shifts into illegal or untaxed channels.

Canada went up this learning curve a few years ago when it enacted a New 
York-size cigarette tax. It finally threw in the towel when it realized 
that the revenues were being captured by cross-border smugglers instead of 
the budget. Mayor Bloomberg seems determined to learn the lesson himself 
the hard way.

In the short term, higher taxes probably do drive some people to quit. (A 
recent study from MIT suggests that with each increase in the price of a 
pack of smokes, puffers exercise greater self-control and are grateful for 
it.) But the truth about tobacco taxes is that they are less a cure for 
nicotine addiction than they are a way (albeit not very effective) for the 
state to exploit addiction for its own financial advantage.

As the chief of the Unkechaug Nation was quoted as saying the other day, 
"If they're so bad, make them illegal. In the meantime, leave me alone."
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