Like all traditional retailers, New York tobacconists face an increasingly competitive marketplace. Even if price did not matter, today’s consumer craves convenience and has grown accustomed to having products delivered to his or her doorstep.
But price does matter. That’s why we urge the New York Legislature to adopt legislation that would cap the excise tax paid on cigars at $0.50 and give state tobacconists a fair chance.
New York taxes all cigars at 75% of the wholesale price. This compares to rates of 50% in Connecticut, 40% in Massachusetts, 30% in New Jersey and 15% in Delaware and Maryland. And, in Pennsylvania, a state that shares a 225-mile border with New York? Pennsylvania has no cigar excise tax – zero!
In this hyper-competitive environment, it is unfortunate that New York excise tax rates put state tobacconists at a disadvantage by imposing a cigar excise tax rate of 75% of the wholesale price.
To put the rate into perspective, it means that on a single cigar it is not uncommon for New York to collect $3, $4, or even $5 in excise tax. On a box of 20 cigars, the excise tax can easily amount to $100 or more. Clearly, cigar sales in New York are more profitable for the state than for the roughly 200 small businesses struggling to stay in operation.
Vermont and Rhode Island, unlike the states listed above, have tax rates higher than New York’s 75% – 92% in Vermont and 80% in Rhode Island. To mitigate the impact of these high excise tax rates on small, local businesses, these states have an excise tax cap for cigars. In Vermont, the cap for most cigars is $2 but, in Rhode Island and Connecticut it’s $0.50, the same rate proposed by pending bills.
In fact, there are 15 states that employ an excise tax cap on cigars, with Idaho, Indiana and Montana just joining the group, and 13 of these states set the rate at $0.65 or less, with 11 at $0.50 or less.
The economics of cigar excise tax caps have been well-tested. Since price does matter, the cap will make New York tobacconists more competitive, and repatriate lost cross border sales. To state the obvious, 75% of zero is still zero – which is what New York collects when residents make purchases out of state.
In fact, Michigan’s tax cap has been such a success for the state that in 2021 the legislature removed its sunset provision, making the tax cap permanent. Thus, the tax cap will likely be a win for New York’s cigar enthusiasts, tobacconists and, likely, the state treasury.
A cigar tax cap is sound public policy and makes good sense for the small businesses that are retail tobacconists in the state. New York should follow the lead of 14 other states and enact a cigar tax cap.
