Native American Cigarette Tax Arbitrage

New York State has the highest cigarette taxes in the nation, which also means it features the most aggressive tax avoidance schemes. For a while, the state’s Indian tribes maintained that they could retail nationally recognized cigarette brands on tribal lands without paying the tax, a legal position the state never recognized and that they had trouble gaining support for. The new idea is that they can import tobacco from the Carolinas and then make the cigarettes on tribal land and sell them on the cheap. Andrew Cuomo’s administration maintains that this is illegal, but has not in practice done anything to move against it.

This is a reminder that while the “Laffer Curve” does not characterize taxation in the United States as a whole, it probably does apply to cigarette taxes in the highest tax jurisdictions. The combination of success in pushing people to quit smoking and success in pushing smokers to come up with ways to avoid paying the taxes has pushed revenues below what could be gained. In public health terms, that’s all fine, but for a while higher cigarette taxes were a rare form of politically palatable revenue-raiser, and one that’s increasingly difficult to make work.