Taxing Your Way to the Poor House

File this one under, “you can’t tax your way out of bad economic policy.”

It’s no secret that New York – once upon a time one of the economic powerhouses of the Unites States – has fallen on hard times. Particularly in the upstate region, crippling tax rates on both businesses and individuals combined with an extended period of economic lethargy have resulted in employers fleeing to more favorable climes and the workers following them. (The population decline has been such that on Dec. 31st we’ll find out if we’re losing one or two congressional seats.)

One result of this is reduced revenue for the state government and increasingly disastrous budgets. But in typical fashion, rather than countering these trends to bring jobs back, the Empire State decided to just keep jacking up taxes on pretty much everything. This included the latest round of increases on cigarette taxes to the tune of an additional $1.60 per pack- a move which Governor Paterson claimed would bring in more than a quarter billion dollars for the state’s coffers. So, how did that work out?

Following the trend started in July, data show that sales of taxed cigarettes have dropped 27% since the new taxes went into effect, with retailers selling an average of 30 million packs per months, 11 million fewer packs than before the new tax. Time for a little cigarette math!

If Albany was making $2.75 off an average of 41 million packs a month, they were earning around $113 million. With the new $4.35 tax on 30 million packs, they’re making about $130 million. Far from the $260 million Paterson planned on making.

Well, it may not be much in the way of a cash windfall, but at least they’ve gotten millions of people to stop smoking – a huge positive effect – right?

Not so much. People were already running the borders to Vermont and New Jersey to save money, and now the trend has spread to Pennsylvania where the price is nearly half that in New York.

In a two-mile strip off Route 6 in the state, eight tobacco shops have recently popped up where its easy to buy and sell back to broke smokers looking for an angry fix. One research scientist said, “If you talk to smugglers, it’s a piece of cake. The profit margin is good, the penalties are low, and it beats selling cocaine.”

Yes, it’s not just individual smokers heading over the border to get their fix. It’s a new generation of bootleggers who are not only allowing people to continue smoking, but are cutting the profits of small businesses who have lost sales.

On the plus side, it’s providing work for anyone with a truck who is willing to undertake a bit of smuggling. Hey … who said the government can’t create jobs?