Austerity Measurement: New York Tobacconistas And Simulated Sovereignty

—by , September 16, 2010

To the addicted, a deal on their drug of choice is attractive in almost any circumstance. A dedicated drinker will go out of their way to buy cases of their preferred brand at a larger outlet for a third less than it might cost to buy the six-pack down the street. Or a fifth of what he’ll pay per beer at the bar. And few moral hazards are as easy to ignore as getting an illegal deal on cigarettes. If you smoke.

Price-shopping is seen as an inherent value within capitalism, and in down times, its effect is magnified. For two-pack-a-day smokers in heavily-taxed states, tax avoidance can save over $3,500 throughout the course of a year.

And, as someone who’s done it, smoking two packs a day isn’t a badge of honor. It’s a financial obligation. Like rent.

There are no Labor Day, Memorial Day, or Christmas season sales on cigarettes. Ever. Unlike alcohol sales, the only way to get a cheaper fix on the brand of cigarettes you smoke in your home state is to break the law. Period. There will always be some variance among convenience store prices, but it’s a small range, because the margins are all tax. Beyond that, individuals looking to get cheaper cigarettes have to switch to off brands (for small and unsatisfying savings) or circumvent the tax laws by going elsewhere to purchase cigarettes.

If a cigarette is smoked in a state other than the one it was bought in, it’s illegal, unless the state excise tax is paid. The law is simple. The enforcement, however, is difficult. If you go to Pennsylvania and buy a carton of cigarettes to smoke in New Jersey, you are legally obligated to pay the New Jersey state excise tax for that carton. Similarly, if you buy that carton and drive across three to four states, smoking cigarettes along the way, you’re obligated to pay excise tax on the cigarettes you smoked in each state.

You don’t even get a discount for the Pennsylvania state tax you paid.

Prior to very recent times, this wasn’t much of a problem. It wasn’t worth it to enforce the law. Is the state excise stamp on the bottom of your cigarettes during a routine traffic stop fair game, like your immigration status in Arizona? Relatively stable tax rates for cigarettes up until the late ‘90s and the inconvenience of driving to a relative tax haven to buy smokes made this an easily ignored problem. Now that taxes on cigarettes are raised on an almost yearly basis in many states and chasing for pennies is the doctrine of state budgets, attention is being paid to lost tax revenue over cigarette sales.

And the battleground is New York State, home of the highest cigarette taxes in the nation, where it’s estimated that about $200 million a year in tax revenue is lost via cigarette sales tax evasion.

The politically crippled New York state governor (and admitted drug user), David Patterson, has taken an unusual approach to ensuring taxes on state cigarette sales are excised when sold by sovereign Indian nations to ordinary NY residents. He’s proposed the excise tax on cigarettes applied before the tribes purchase them, rather than applied at the point of sale.

The tribes say this is an unheard of example of one government taxing another, but it’s actually rather normal among sovereign nations. It’s called a tariff. The main question, however, is if New York is a sovereign nation and has the right to apply tariffs to another quasi-sovereign state. But Indian reservations are considered de facto economically disadvantaged based on a number of legal precedents, and so applying a tariff to an economically disadvantaged sovereign country that lies within your own border is, well, rather extreme.

So is the established alternative of a border checkpoint. The legal status of checkpoints around sovereign Indian nations is debatable, but that’s how they’re supposed to make sure you’re not bringing Cuban cigars in from Canada. Or marijuana in from Mexico. And making certain that you’re paying proper excise tax on those goods. Ever fill out one of those forms accurately on a plane? What did you buy on this pleasure trip? The subtext: if it’s over a certain amount, we’re going to tax it.

People are mum. There are no Cuban cigars in the car, officer. We didn’t buy anything during our European vacation. Imagine that! We should go back! And let’s not forget the duty free!

One New York State Indian reservation, the Oneida nation, had the foresight to start some of its own cigarette brands years ago, and is now moving the manufacturing onto their land to ensure they won’t be subject to Patterson’s tariff. But there may be an easier path to ensuring that cigarettes sold by sovereign Indian nations are exempt altogether from such executive bullying.

Statehood.

Well, come on. Maryland doesn’t get angry at Delaware for their lack of a sales tax. Not in public anyway. Same goes for every state around New Hampshire. Sure, if you buy something in a sales-tax free state and transport it to another state, you’re supposed to pay the tax in the state you use the product in, but who does? And who puts up a fight? Someone’s making money somewhere, and it’s another state. You can’t fight another state like you can an Indian reservation.

A path to statehood for Indian reservations. Sure, it’ll still be illegal for them to sell cigarettes to people who use them on other state lands, but you’ll never see one state try to tax another in advance. Most of them can’t even figure out how to tax Amazon yet.

Now there’s a tax shortfall.


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