Extras on Excise: Modern-Day Bootlegger Emphasizes the Effect of Taxes on Human Behavior

On Dec. 8, 2017, the New York Department of Taxation and Finance issued a press release regarding a memorable crime. Police stopped a state resident’s van, and they realized he was hauling 757 liters of Hennessey, Beefeater gin, and Bailey’s (check out the photo the department attached to the release!) allegedly purchased in New Hampshire, “apparently with the intent of selling it [in New York].” While the sheer volume of liquor stuffed into his vehicle is amusing, the more important takeaway is how this case illustrates the incentives created by taxation policies.

Bloomberg BNA has often covered New York’s efforts to enforce its tobacco taxation and licensing laws; the highest amount of inbound cigarette smuggling happens in New York, which the Tax Foundation connects to its tax rates. At $5.85 in New York City and $4.35 per pack elsewhere in the state, (not including sales taxes), New York imposes the highest excise tax rates in the country. Lower tax rates offered by nearby states such as Virginia ($0.30 per pack) and Maryland ($2 per pack), often incentivize entrepreneurial “buttleggers” to stock up on cigarettes there and take them back to the Empire State for resale.

Similar tax situations can guide behavior for other products subject to “sin” taxes.

The suspect in this case followed this sort of business model in his apparent efforts to be Rum-Runner of the Year. He purchased his alcohol from five stores in New Hampshire, where customers pay no excise or sales taxes on distilled spirits. His home state of New York, however, imposes an excise tax rate of $1.70 per liter for these beverages. Had he not been caught, he likely would have made some profit from the tax savings alone. The alleged perpetrator is not alone, as twenty-five percent of the alcohol sold in New York City is smuggled in from across state borders, according to a 2016 Crain’s New York Business article, which pins alcohol trafficking largely on the state’s tax rate.

The suspect faces two felony charges: possessing more than 360 liters of liquor that he hadn’t paid New York taxes on (over a thousand dollars’ worth) and acting as a distributor without proper registration.

While we may often think of bootleggers as relics of Prohibition, wearing fedoras and pinstripe suits as they smuggle liquor in dry jurisdictions à la the Great Gatsby, they’re still operating today. But instead of battling the Eighteenth Amendment, bootleggers (and buttleggers) are using differences in states’ sin tax rates for arbitrage.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What is the proper mechanism for reducing bootlegging and buttlegging?

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