As New York considers nicotine-pouch tax hike, analysis shows link between high cigarette taxes and criminal market

New York has the highest cigarette tax in the nation at $4.35 per pack and ranks second in the country for illicit cigarette activity.

That’s according to an analysis of tax rates and smuggling activity by the Tax Foundation.

“The data show a strong positive relationship between cigarette smuggling and tax rates across the country,” wrote the report authors, Adam Hoffer, director of excise tax policy, and Jacob Macumber-Rosin, excise tax policy analyst, at the foundation. 

“While some states may benefit from cross-border trade, no state benefits from the illicit market of smuggled and counterfeit cigarettes,” said the report. “Many of these illicit cigarettes are smuggled from China, where an estimated 400 billion counterfeit cigarettes are produced annually.”

“Counterfeit cigarettes are often more dangerous, containing toxic heavy metals and other contaminants, and some of the billions of dollars moved through cigarette smuggling internationally fund terrorism.”

Some analysts have pointed to the correlation between high tax rates and illicit tobacco activity in addressing Gov. Kathy Hochul’s (D-NY) proposed tax increase in nicotine pouches. 

The governor’s latest budget proposed applying the state’s existing tobacco tax framework to nicotine pouches, including a 75% excise tax similar to the levy on other non-cigarette tobacco products. 

This tax increase “would encourage the growth of illegal and unregulated markets, as high taxes have historically driven consumers toward illicit channels with unknown quality and safety,” Jeffrey A. Singer, a practicing surgeon and senior fellow at the Cato Institute, wrote in an analysis of Hochul’s proposal.

“The only winners on this are the bad guys,” Former New York City Sheriff Edgar Domenech told Gothamist. “Because they will in fact find ways to get the product to those people, and the city and the state will lose tax revenue.

Last week, the New York Times featured a report about tax increases in Australia fueling a thriving — and violent — illicit cigarette market in the country.

“A series of steep tax hikes — eight in 10 years — were put in place to reduce the rate of smoking, which has steadily declined,” wrote New York Times reporter Victoria Kim. “But the high prices have also given rise to a thriving black market now estimated to be a multibillion-dollar industry that accounts for as much as half of all tobacco sales in the country.”

“The government has said that Australia faces an illegal tobacco ‘crisis,’” Kim wrote. “But it has refused to back down from the tax hikes or acknowledge the role they may have had in fanning the illicit trade, even as it loses billions in tax revenue.”

Kim wrote that criminal activity fueled by Australia’s cigarette taxes also has led to gang “turf wars” and violence “that has been called the ‘tobacco wars’ between criminal gangs vying for market share. 

The Tax Foundation report analyzed cigarette smuggling rates for each state, and compared to the cigarette tax rates in each state. California surpassed New York as the nationwide leader in cigarette smuggling for the first time since the organization has been producing the report.

More than half the cigarettes consumed in both California and New York were not purchased legally in the state.

“As tax rates increase, consumers and suppliers search for ways around these costs,” wrote the report authors. “In cigarette markets, consumers tend to shop across borders where the tax rates are lower, and dealers develop black and gray markets to sell illegally to consumers, paying little or no tax at all.”

Where do all the states rank for cigarette tax rates and criminal activity?