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How to Make a Black Market

eye on the news

How to Make a Black Market

Use tax policy to do social engineering—like New York does with cigarettes and Philadelphia is set to do with soda. June 15, 2016
New York
Economy, finance, and budgets

Philadelphia mayor Jim Kenney has managed to do in six months what former New York City mayor Michael Bloomberg couldn’t pull off in 12 years: pass a consumption tax on soft drinks. The Philly City Council still has to tie a couple of bows on Kenney’s bill—it imposes a 1.5 cent-per-ounce tax on all soda, regular and diet—but it should be law by next month. So chalk up a big win for the sweet-soda prohibitionists. They’ve been pushing without success for just such a law in New York for years, and no doubt they’ll be encouraged by Kenney’s coup.

The rookie mayor had to disguise his bill as something other than a behavior-modification tool. Kenney’s predecessor, Michael Nutter, tried for years to sell it that way, and failed. So, officially, the new tax is a dedicated revenue-raiser for pre-K programs and “community schools.” But it’s basically the same old dame, gussied up in a new gown. Nanny-staters like Bloomberg & Co. don’t like sugar. They know they could never ban it outright, so they try to tax it out of the shopping carts of people who are less enlightened than themselves.

There is nothing intrinsically wrong with using tax policy as a social tool—the mortgage-interest deduction encourages home ownership—but great care should be used when doing so. The law of unintended consequences is ever present. Consider that Kenney’s tax adds 30 cents to the price of a 20-ounce bottle of soda, or $1.80 per six-pack. That may not be a budget buster for most people, but it could add to the incentive to cross city or state lines to go grocery shopping. However, for retailers who deal in, say, 100-case lots ($720), or major-market wholesalers handling 10,000-case shipments ($72,000), the temptation to integrate untaxed product into their inventories and pocket the difference is obvious. That’s how social-engineering taxes create black markets.

New York has had this experience with cigarettes, and the consequences of its off-the-charts taxes on tobacco extend far beyond the odd pack of smokes. Think of the erosion of public confidence in the law in general and the death of Eric Garner on Staten Island in particular. Garner, who died in police custody while resisting arrest, was initially nabbed by cops for selling loose cigarettes, which are frequently untaxed and smuggled into the state. New York declared tax war on tobacco years ago and wages it far more fiercely than any other state. The point is to reduce usage drastically, if not eliminate it outright, and while prohibitive pricing has cut demand, it’s all but impossible to say by how much. The market is too distorted by smuggling to tell.

The Mackinac Center for Public Policy estimates that some 60 percent of the cigarettes smoked in New York—six packs in every ten-pack carton—were smuggled into the state. This isn’t surprising, given that combined city and state taxes amount to $5.85 per pack and drive the cost of a legal carton north of $140 in some parts of the city. Compare that to the standard $40-per-carton at Indian reservations and in low-tax states like Virginia and North Carolina and the payday for smugglers becomes compelling. Just last month, city and state tax officials took down a Chinatown-based smuggling ring that allegedly imported a million packs of contraband smokes into the city every week—roughly $10 million worth, or a potential half-billion-dollar-per-year market.

At the micro-retail level, so-called loosie dealers all over the city still get the same $1 for an individual, untaxed cigarette that was the going rate two years ago—when authorities ordered the crackdown on Staten Island that led directly to the now-infamous death of Eric Garner. Asthmatic, diabetic, and with a bad heart, Garner had been selling loosies for years, and had been arrested for it many times. This time he resisted, and died in custody. But if it fairly can be said that the police handled the matter badly, then it’s also true that a lot of unfortunate decisions were made along the way—none more wrongheaded than the policies that led directly to an egregious, in-open-contempt-of-the-law black market in tobacco.

While Garner’s death was indeed a tragedy, the best way to prevent another such encounter is to reduce New York’s tobacco tax to the point where there’s no black-market money to be made from it. Using the power of taxation to punish other peoples’ lifestyle choices is not only an abuse of that power; it can also be dangerous.

Photo by Spencer Platt/Getty Images

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