The Unintended Consequences of Raising Taxes

New York's sales tax on cigarettes sits at $4.35 per pack — $5.85 if you're in NYC. The taxes are meant to replenish state and local coffers, but tend to pump money into criminal hands instead.

The demand for cigarettes is what economists refer to as highly inelastic. That means consumers tend to be insensitive to changes in price; if the price goes up, people are willing to just pay more, to the extent that they have the money and no other alternatives.

Thats where organized crime comes in-providing alternatives.

The enormous spread between the cost of production and the price after taxes encourages organized crime to transport cigarettes en masse across state lines.

According to the Mackinac Center for Public Policy, 60.9% of the Empire State's cigarettes come from across state lines. New York's rate of inter-state importation is the highest in the union; it's tax rates on cigarettes share the same distinction.

The Virginia State Crime Commision estimates the profit from trafficking a single truckload of cigarettes from Virginia to New York at $4,080,000.

Far from replenishing New York's coffers, the case is a textbook example of the Laffer Curve. Simply put, there's a point of diminishing returns from raising taxes after which revenues decline as rates increase.

Raising taxes ad infinitum doesn't fund public expenditures in kind. It pushes economic activity underground and shifts tax revenues away from the public purse.

What's worse, those lost revenues help fund organizations willing to use violence to get their way.

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Jeff Fong

Jeff covers the intersection of politics, economics, and technology. He currently lives in the SF Bay Area where he works at a start up focused on urban transportation.

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