Implications of recent large excise tax increases on cigarette prices, sales, and tax evasion in New York

On 6/3/2008, New York increased its cigarette excise tax by $1.25, to $2.75 per pack. The tax was increased again on 7/1/2010 by $1.60, to $4.30 per pack. New York state has the highest cigarette tax in the nation, and New York City imposes an additional $1.50 per pack tax. Excise tax increases have been shown to decrease cigarette sales, increase cessation, and prevent youth smoking. However, smokers can avoid the tax by purchasing cigarettes at Indian reservations, on the internet, or neighboring states.

Our main data source is the 2005 - 2009 New York Adult Tobacco Survey (NY-ATS). Approximately 2000 interviews are conducted each quarter. We also use data on tax-paid cigarette sales from the New York Department of Tax and Finance.

One year after the $1.25 tax increase of 6/3/08, self-reported cigarette prices increased from $4.95 to $6.19 per pack. Half of all smokers (50.1%) reported purchasing cigarettes from low-tax locations, costing New York between $467 million and $612 million in lost tax revenue. However, in the year after the tax increase, cigarette excise tax revenues increased 54% to $1.31 billion, while tax paid cigarette sales decreased by 22.8%. We are currently analyzing the 2010 NY-ATS to assess the impact of the 2010 tax increase, and will present those results in addition to those here.

The large tax increases in New York have raised cigarette prices paid by smokers and generated large increases in revenue for the State. However, tax evasion remains a serious issue.