Rising gap in state cigarette taxes

is solid gold for smugglers

By Leigh Dannhauser

Rhode Island has one of the highest cigarette taxes in the nation. It's the only state other than Connecticut and New York with a rate of at least $3.40 per pack.

In New York, smokers have seen the price of a pack of cigarettes skyrocket in the past decade.

That’s largely because New York’s tax on cigarettes nearly tripled between 2006 and 2012, according to information provided by the Tax Foundation, a research think tank based in Washington, D.C.

The least that smokers in New York City can now pay legally for a pack of cigarettes is $10.50. Former mayor Michael Bloomberg signed legislation in 2013 creating the pricing floor.

In a dozen states besides New York, Rhode Island and Connecticut, the state tax rate has at least doubled. But in 20 states, including Virginia, the state excise tax rate did not move a cent during the same six-year period.

Even taking into account the $1.01 per pack federal tax that is assessed nationwide, the difference in tax rates state to state has created a bigger and bigger gap in what people pay for cigarettes across the country.

Taxes on cigarettes have seen sharp increases  in some states since 2000. But the difference state-to-state has gotten bigger. Information from the Federation of Tax Administrators. By Leigh Dannhauser.

It’s not only smokers in Virginia who enjoy cheaper cigarettes. Smugglers can buy legally taxed cigarettes in Virginia and resell them illegally in New York, Pennsylvania, Rhode Island, Massachusetts and other high-tax states for a hefty profit, even when they undercut the legal price by several dollars a pack.

Today the state tax rate difference between New York and Virginia is more than four dollars. Virginia has the second lowest state excise tax rate at 30 cents a pack – only Missouri’s is lower at 17 cents – while New York has a rate of $4.35 a pack. Virginia last raised its tax rate in 2005, from 20 cents to 30 cents a pack. In 2004 Virginia’s tax rate jumped from 2.5 cents a pack to 20 cents, an eightfold increase.

In 2011 and 2012 Del. Patrick A. Hope, D.-Arlington, tried to persuade the General Assembly to raise the tax again to closer to what was then the national average of $1.45 a pack. Both attempts failed.

Virginians paid an average of $4.62 for a new pack of cigarettes in 2013, according to the Campaign for Tobacco-Free Kids, nearly six dollars less than the legal minimum in New York City.

State cigarette tax rates. By Leigh Dannhauser.

Despite the second-lowest rate in the nation, Virginia collected about $170 million in cigarette taxes each budget year in 2012 and 2013, according to the American Lung Association.

David Marshall and Kenneth Mosley, tobacco experts with the Bureau of Alcohol, Tobacco, Firearms and Explosives, say most smuggled cigarettes from Virginia that end up in New York have had Virginia taxes paid on them. Based on estimates of legally bought Virginia cigarettes that are illegally sold up north, the state could be reaping about $36 million in tax revenue from smuggling.

All that tobacco tax money in Virginia goes to the state’s Health Care Fund, state department of taxation spokeswoman Koury Wilson said in an email.

State cigarette tax stamps can be found on the bottom of packs.

Brian Logwood, associate director of Virginia’s department of planning and budget, said the money helps pay for Medicaid services. The federal government pays the rest of the cost of Medicaid -- about 50 percent.

Another $48 million this year in Virginia will go into the Health Care Fund from the Master Tobacco Settlement Agreement, the deal multiple state governments reached with tobacco companies in 1998 to offset the public health costs of smoking.

But none of that money goes directly to local governments in Virginia, so many cities levy an additional tax on cigarettes.

Lexington, Rockbridge County and Buena Vista are not among them.

While cities and towns in Virginia have the power to impose a local tax on cigarettes, most counties cannot.

And Lexington City Manager Jon Ellestad says that, while the city levies a local general sales tax, the city won’t levy a local tobacco tax as long as the county doesn’t. City officials are afraid a cigarette tax would prompt city residents to do their shopping in the county, and not just for cigarettes.

That would result in a net loss of tax revenue for the city, Ellestad said.