TheIntendedandUnintendedConsequencesofaLegal ...

1 The Intended and Unintended Consequences of a LegalMeasure to Cut the Flow of Illegal Cigarettes Into New YorkCity: The Case of the South BronxMarin Kurti, MA, Klaus von Lampe, Dr. jur. (PhD), and Jacqueline Johnson, PhDIn June 2010, as part of an emergency budgetmeasure, New York State raised its cigarette taxfrom $ to $ per pack and, in an effortto prevent smokers from circumventing statecigarette taxes, amended its tax law so that NativeAmerican reservations would no longer be ableto sell untaxed cigarettes to non---tribal mem-bers. Since the 1980s, Native American reser-vations within New York State have importedbillions of premium brand cigarettes, resellingthem directly to smokers or to bootleggers whoin turn supplied a thriving black market, par-ticularly in New York City. This constituteda considerable challenge to smoking cessationpolicies that relied on high cigarette taxes as aneconomic disincentive for smokers.

2 After a le-gal battle between several Native Americantribes and the governor of New York, the taxamendment went into effect in June goal was to assess the effects of this taxamendment on the illegal cigarette market ineconomically disadvantaged neighborhoods inNew York City, taking the South Bronx as anexample. Specifically, we examined whetherthe measure has been successful in cutting offthe supply of untaxed cigarettes from NativeAmerican reservations and whether it resultedin a reduction in the overall prevalence ofillegal cigarettes, thus preventing a displace-ment to other sources of illegal cigarettes inresponse to increased cigarette SALES ON NEW YORKSTATE TRIBAL LANDSIn October 2009, before the Senate Stand-ing Committee on Investigations and Govern-ment Operations, William Comiskey, thendeputy commissioner of the New York StateDepartment of Taxation and Finance, outlinedthe unprecedented increase in the volume ofuntaxed cigarettes purchased by Native Amer-ican reservations in New York between 1988and 2008; during this period, the number ofcartons sold grew from million ( billioncigarettes) to million ( billion cigarettes),a 382% increase.

3 These purchases clearlyexceeded tribal consumer demand. For example,in 2008, the Poospatuck Reservation on LongIsland with a population of 376 purchasedmore than million cartons of cigarettes,equating to each tribal member purchasing 614packs (12280 cigarettes) per federal law grants sovereign statusto Native American tribes, New York State isbarred from collecting cigarette taxes fromtribal members who reside within tribal terri-tories, as well as Native Americans at , courts have ruled that collection oftaxes on cigarettes sold to non---tribal membersor non---Native Americans does not violateNative American to the tax amendment of 2010, NewYork State had unsuccessfully attempted to placerestrictions on the supply of untaxed cigarettes totribal stores and persuade Native Americans tocollect New York State taxes on cigarettes sold tonon---tribal members. Tribal stores located onNative American reservations within New YorkState were able to purchase large quantities ofnon---tribal brand cigarettes from legitimatewholesale dealers without a New York State taxstamp affixed to the packs.

4 As a result, tribalstores could offer cigarettes at prices that weresignificantly lower than the prices consumershad to pay outside of the June 2010, New York State amended itstax law, specifying that Native American res-ervations would be required to collect statetaxes on cigarettes sold to non---tribal membersand that wholesale dealers would be requiredto affix tax stamps on all cigarette packs shippedto reservations (even on tax-exempt cigarettes tobe sold to tribal members).4,5 Native Americanreservations were given 3 options to legallypurchase tax-free cigarettes: they could doso through an Indian tax exemption couponsystem or a prior approval system, or theycould negotiate a customized , examined the impact of a change in New York tax law on thenumbers of untaxed cigarettes bootlegged from Native American reservationsand resold in the South cigarette packs were systematically collected in 30randomized South Bronx census tracks before and after the amended tax lawwent into effect in 2011.

5 Also, administrative data were gathered on the numberof taxed cigarettes sold in New York State, including sales to Native the tax amendment, 42% of discarded cigarette packs collectedin the South Bronx had no tax stamp. After the tax law went into effect, thepercentage of cigarette packs without tax stamps declined to Simulta-neously, the percentage of packs with out-of-state tax stamps rose from The percentage of packs with a combined New York State and New YorkCity tax stamp did not change after the tax the tax amendment, the supply of contraband cigarettesappears to have quickly shifted from one lower-priced jurisdiction to anotherwithout a change in the overall prevalence of contraband cigarettes. (Am J PublicHealth. Published online ahead of print February 25, 2015: e1 e7. )RESEARCH AND PRACTICEP ublished online ahead of print February 25, 2015|American Journal of Public HealthKurti et al.

6 |Peer Reviewed|Research and Practice|e1 Under the coupon system, Native Americanreservations could receive tax exemption cou-pons for a specified number of cigarettes eachquarter (December, March, June, and Septem-ber) according to a probable demand calcula-tion in which reservations population statisticswere multiplied by the nationwide per capitaconsumption of retailerscould use these coupons to purchase tax-freecigarettes from wholesale dealers. In turn, thewholesale dealers could present the coupons tothe New York State Department of Taxationand Finance to receive a refund on the the prior approval system thedefault system if none of the other options werechosen wholesale dealers were allowed to sella specified allotment of cigarettes to NativeAmerican reservations with the prior approvalof the New York State Department of Taxationand amendment was scheduled to takeeffect on September 1, , theamendment was met with legal strife when 3separate court cases12---14werefiled challengingthe legislation.

7 The courts rejected 2 of the suitswhile granting a preliminary injunction againstthe amended tax law in the case ofOneidaNation of New York v. Paterson(2010).13 New York State appealed the ruling, and onMay 9, 2011, the United States Court of Appealsaffirmed New York Tax Law 471 and 471-e,arguing that it did not interfere with the sover-eignty of Native American reservations becauseNativeAmericans would still be able to purchasetax-free cigarettes. The court also asserted thatNew York State would not be placing undueharm on Native Americans economy by stipu-lating that they prepay taxes on cigarettes theyintended to sell to non---tribal went into effect on June 21, 2011,putting an immediate stop to untaxed cigarettesbeing supplied to tribal stores. Meanwhile, tribalbrand cigarettes produced on tribal land couldstill be sold on Native American reservationswithout a New York State tax examining the effects of the change in lawin New York, we relied on 2 separate datasources: collection of discarded cigarette packsand administrative data on the sale of cigarettesin New York Pack SurveyTo determine the prevalence and nature ofillegal cigarettes in New York City before andafter the tax amendment went into effect inJune 2011, we drew on littered pack surveysconducted in the South Bronx in March 2011,March 2012, and March 2013.

8 We selectedthe South Bronx as a research site to study theprevalence of illegal cigarettes in New YorkCity because it features several factors com-monly assumed to contribute to the existenceof a local illegal cigarette , the smoking prevalence in the SouthBronx is relatively high by New York stan-dards; of adults in the South Bronxsmoke, as compared with of adults inNew York City as a , ofthe population in the South Bronx lives belowthe poverty line, as compared with ofthe total New York City ,the South Bronx is located in relatively closeproximity to a number of lower tax jurisdic-tions, including upstate Native American res-ervations and the states of New Jersey andPennsylvania. Thus, although the South Bronxcannot necessarily be viewed as representativeof New York City as a whole, there is anexpectation that any changes in the supply ofillegal cigarettes to New York City would beparticularly prevalent in this pack surveys are an establishedmethodology involving the systematic collec-tion and analysis of discarded cigarette packs themselves and the tax stampsaffixed to them indicate the brand, the state andcity of purchase, and whether the cigaretteswere legally purchased in the jurisdictionwhere the pack was discarded and, most likely,consumed.

9 The methodology was limited be-cause it is not known to what extent thoselittering cigarette packs are representative ofthe general population of smokers who residein the South Bronx. This limitation and others,however, are mitigated in before-and-aftercomparisons such as that of the present 163 census tracts within the boundary ofthe South Bronx, as defined by the New YorkCity Department of Health and Mental Hy-giene s District Public Health Offices, wereevaluated for inclusion in the tracts were matched with populationsize parameters extracted from the 2000 UScensus. Probability proportional to sample sizemethodology was used to select 30 censustracts covering 371 blocks. This samplingmethod is preferable to simple random sam-pling because higher probability levels areafforded to census tracts with the highestpopulation parameters, ensuring that residen-tial areas are 3 consecutive surveys in 2011, 2012,and 2013 followed identical methodologicalroutines, covering all of the 371 blocks withinthe selected 30 census tracts.

10 All discardedcigarette packs were collected from the streets,curbs, and sidewalks within each block. Ciga-rette packs in public and private trash recep-tacles were not collected because of potentialhealth hazards, as well as legal prohibitionsagainst such surveys yielded a total of 1737 cigarettepacks (497 in March 2011, 639 in March2012, and 601 in March 2013). Because taxstamps are affixed to the cellophane wrappersof cigarette packs, only packs that still hada cellophane wrapper were included in thesubsequent analysis (n =1111). As a means ofdifferentiating between counterfeit and genu-ine tax stamps, cigarette packs collected in thefirst round that bore a joint New York City/New York State or a New York State tax stampwere analyzed by the New York State De-partment of Taxation and Finance, and thepacks collected in the second and third roundswere analyzed by the Office of the Sheriff of theNew York City Department of Finance.