Governor Saddles Up on Indian Cigarette Taxes

The Alliance has been fighting for the better part of a decade to get the governor of New York to simply enforce the law and end the lucrative cigarette black market that is crippling small businesses all over the state. And yesterday, David Paterson finally said, "Enough's enough!"

As the Observer points out: "Governor Paterson is taking on the American Indians in New York, moving to collect taxes on cigarettes sold within reservations to non-Indians. The move is sure to provoke a fight, and past attempts have led to a tremendous backlash, with the Seneca tribe shutting down a highway near Buffalo. The move, announced Tuesday as part of his executive budget, has been pushed by legislators and budget watchdogs as an easy source of revenue—State Senator Carl Kruger has said it could be $1 billion a year—that is due to New York. The Seneca have opposed it, saying that as a sovereign nation, the state does not have the right to collect such taxes."

And the move by the governor drew praise from legislators in attendance. As Crain's Insider tells us (subsc.): "Gov. Paterson drew applause—tepid, but genuine—from legislators exactly once yesterday as he proposed his flat-spending budget for fiscal 2011. The clapping occurred when he called for enforcing the law on Indian tribes that are selling tobacco tax-free to non-Indians."

Legislators have grown frustrated seeing how, year after year, governors from Pataki to Paterson have ignored the laws they have passed to begin the collection process. But this year, Senator Carl Kruger began to draw a line in the sand-and the state is in such dire straights that the time was right for Paterson's about face: "The Pataki administration’s failed attempt to do so in 1997 resulted in tribes shutting down the New York State Thruway with a tire-burning protest. But there is a political as well as a fiscal upside to collecting the taxes now: It would prevent legislators like Sen. Carl Kruger from reprising their argument that Paterson should not slash services before collecting taxes on tribal tobacco sales."

We need to remember that the Paterson administration was singing a completely different tune last Fall-as the Observer reminds us: "This is a turn for the Paterson administration, which was resistant to legislators' calls to impose new rules on collecting the taxes. The governor's counsel, Peter Kiernan, said this of the taxes at a Senate committee in October: "While that remains an option, it is a one-dimensional choice that could have deleterious consequence that could include resistance, violence and retrenchment."

But, important and symbolic as was the the governor's change of heart yesterday, it doesn't mean that supporters of collection have a straight run to victory on this contentious issue: "Then again, it's unclear just how serious the administration is about the plan. The governor did not include revenue from the tax collections in his budget, saying that it would hold off until a six-month public comment period ends. Budget director Robert Megna told reporters this was because the state was being conservative in its expectations and that "We expect that ongoing negotiations will take place" with the Indians."

Which isn't quite true, because buried in the governor's budget proposal on page 98, under, "improve audit and compliance," is a $221,000,000 projection from this change in policy direction. But the Observer's warning is merited-as Senator Kruger makes clear in a press release he issued yesterday: “I am encouraged by the Governor's renewed attention to the need to collect the hundreds of millions of dollars in tax revenue from sales of cigarettes by Native American enterprises to non-Indian customers,” Sen. Kruger said. “Rescinding the Tax Department's policy of forbearance, as the Governor now says he intends to do, would be a huge step forward. But we need to see a timetable, and we need to proceed in the proper sequence.”

And Kruger goes on to outline the steps that need to be taken on this: "He said the Governor must announce first that all cigarettes available for sale in the state must be tax-stamped, and that Native Americans living on reservations will be able to purchase cigarettes free of tax for their personal consumption through the issuance of ‘tax- free coupons’ to the tribes. When this takes place, “the Attorney General can go back into state court demonstrating compliance and have the present injunction lifted,” Sen. Kruger said."

All of which underscores that there is still much work left to be done-and that end zone dances today are premature. But we are still encouraged because of the damage the so-called policy of forbearance has done to the most vulnerable small businesses in New York-and it is why we will be holding a major press conference on this next week at City Hall-as Crain's reports:

"Paterson will find allies outside the Legislature, too. Stores say they lose millions of dollars in sales to a black market fed by the tribes. A coalition of legislators, anti-smoking groups and merchants, organized in part by lobbyist Richard Lipsky, plans a Jan. 28 press conference to support enforcement. Lipsky says bootleggers routinely drive to Southampton to buy cigarettes from Indians, who legally may exempt only Indian buyers from sales taxes. Lipsky estimates that a single van can hold $150,000 worth of smokes, which are then resold illegally to consumers, costing the state and its localities $1 billion annually. The key to enforcing the law, advocates say, is requiring cigarette wholesalers to buy tax stamps for their product."

We need to remember that this long battle had one individual, Red Apple chairman John Catsimatidis, who never tired of keeping the issue alive-paying for ads castigating the state's non actions and initiating his own law suit that was followed by Mayor Bloomberg's own legal challenge. In a major way, the Paterson reversal is a tribute to Catsimatidis' perserverance.

But the work is unfinished, and the Insider offers this final cautionary note: "During his speech, Paterson promised tribes that he would continue to talk with them. Negotiations have never succeeded, though, because the tribes know their sales would plunge if they charged tax."

Now, more than ever, we need to push the governor to develop an immediate enforcement timetable. Let's be clear: this is money that's on the table, and can be collected now if the steps outlined by Senator Kruger are followed. We aim to make sure that they are.