Indian Cigarettes and a Sea of Red Ink

Last week-just as the year was winding down-we received the ominous news about the sad state of NY State finances. As the NY Times reported: "New York is about to achieve a dubious milestone: For the first time in history, the state’s main bank account is poised to end the year in the red. After months of plunging revenues and weeks of budget battles, New York had a negative balance of $174 million in its general fund on Wednesday, with nearly $1 billion in bills owed by day’s end. Every sign pointed to the account’s still being in the hole when 2010 begins."

So what's a state to do-kite checks perhaps: "To fill the gap, New York will be forced to rely on its own version of overdraft protection by raiding its short-term investment pool — a kind of statewide checking account. But that account itself is dangerously low, with only about $800 million on hand, compared with a balance in more flush years of as much as $16 billion."

Are we getting the picture yet? After years of over spending and borrowing, it is time to pay the piper-but the governor, to his credit, is rejecting any new taxes. According to the NY Post: "Gov. Paterson fired a warning shot this morning at any lawmakers who might be contemplating another income tax hike to close next year's massive budget deficit. During an interview on WOR 710 AM, Paterson cited "rumors" that some legislators might be plotting to push for the second tax hike in as many years to avoid painful cuts to state aid. "I heard a rumor yesterday that some of my colleagues are talking about another millionaires tax and that would demonstrate, I would say, a completely addictive personality," Paterson said."

But clearly, strong measures need to be taken, as unpaid bills pile up with risky borrowing as the state's short term alternative. As the Times points out: "While New York’s fiscal year does not end until March 31, its cash shortage could force it to borrow more money to pay for its daily operations, adding to the interest on loans that already costs $1 billion a year. And the financial problems will raise alarms among rating agencies that are already keeping a close eye on New York’s credit-worthiness, with the risk of a lower credit rating — and higher interest payments to future bondholders — already looming."

What's a governor to do? "The Paterson administration has raised the possibility of layoffs, furloughs and the partial shutdown of state government if the stalemate with lawmakers persists. And the situation will grow more serious next year when the budget deficit is expected to be even higher."

OK, we get the picture-the situation is dire. But let us digress a moment so we can raise one of our pet topics; the failure of the very same governor to tap the uncollected taxes that are being blatantly avoided by our Native American scofflaws. The rising estimate is that there is now around $1.6 billion in uncollected taxes-all due to the fecklessness of the suddenly tough talking chief executive.

How is the general public going to feel if school aid and health care funds are cut-as City Room reports that Paterson's already doing- because the governor of the great state of New York is simply too timid to take action against the most arrogant refusal of a small group of tax cheats to obey the law? And the governor is even crowing about his own prescience-eliding the fact that he has an immediate cash flow at his beck and call if he would only demonstrate real cojones, and not the phony saber rattling against the legislature:

"As New York ended the year on Thursday with cash reserves at a historic low, Gov. David A. Paterson had a New Year’s message for his critics: Told you so. When Mr. Paterson delayed $750 million in state payments to school districts and local governments earlier this month, he faced a welter of criticism from lawmakers..."

And in regards to the Indian tax issue, a sign of the times was observed by the paper's Sewell Chan last week. As City Room observed, there is a road sign up on Route 20 in Senaca Falls simply saying in red ink (how appropriate): “Non-Tribal Businesses Dying Here. Do Your Job!” The admonition refers to the fact that the state's convenience stores-and the city's newsstands and bodegas-are dying from the contraband business being done by Indian retailers-while the governor fiddles.

A little less than a decade ago, the state's legitimate retailers was selling around 100 million cartons of smokes. Now that number has been cut in half-with Deputy Tax Commissioner Comiskey telling the legislature that the Indians were selling 47 million cartons by 2005-a number that has risen in the climate of non-enforcement.

What does this mean? Well, in the first place, it means that the state is being overrun by buttleggers. As the Times reported in 2008: "He emerged from the No. 2 subway at 125th Street wearing a bright orange shirt and aviator sunglasses, with a small backpack concealing his stock in trade — tax-free Newport cigarettes. Like a Yankee Stadium hawker, but in voice closer to a stage whisper, he kept repeating his pitch: “Newports. Loosies. Shorts. Longs.”
His name is Paco, but on the streets of Harlem he is known simply as a “$5 man,” the nickname for a highly visible network of peddlers who sell bootleg cigarettes. His illegal traffic in Newports — $5 a pack or a single “loosie” cigarette for 50 cents — can bring him $100 or more a day."

This rampant disregard for the law is going on all over the poorer neighborhoods of the city-and often right in front of the very bodegas that are the legitimate and licensed sellers of the tobacco products. It is costing these small stores over $260 million a year in loost sales-adding to their economic problems in the current recession.

Needless to say, "Paco" isn't proofing his customers, and his discounted ciggies are generating an even greater demand for the product than would the higher priced packs. As the Times observes: "Antismoking advocates say the issue goes beyond lost tax revenue. Dr. Donna Shelley, a New York University professor in public health who has studied the $5 men, says the bootlegging of cheap cigarettes to low-income neighborhoods — where rates of smoking and smoking-related diseases have been high historically — “undermines the smokers’ ability to quit and their motivation to quit.”

And the supply is coming right off of the reservations: "Paco will not reveal his last name or the source of his Newports, the menthol brand widely popular in urban communities. But legal authorities say the trail of the $5 men leads to American Indian reservations in New York State, a path they contend is smoothed by the tacit cooperation of some cigarette makers and distributors. In New York City, where state and city excise taxes total $4.25 a pack, often pushing the retail price above $9, tax-free cigarettes from the reservations fuel a particularly active underground tobacco economy, law enforcement officials say."

The untaxed cigarettes could-by themselves-almost cover the state's entire budget shortfall: "Combined, the city and state are losing more than $1 billion a year in tax revenue as a result of bootleg cigarettes distributed through New York’s reservations, Mayor Michael R. Bloomberg’s office said on Monday. The losses to the city alone would pay the annual salaries and benefits for more than 3,000 schoolteachers, the mayor’s office said."

There are around 20,000 Indians, yes only 20,000, living on reservations in New York State. They receive free health care and go to the state's public schools. From the standpoint of social services, they are full citizens of New York. Ah, but when it comes to the retail smoke shops that they run, no longer are they citizens but, mirabile dictu, they are transformed into sovereign nations refusing to obey state and federal laws.

And the lucre that these shops generate? With at least 40 million cases sold illegally, the take from the scam runs into the billions-all to the benefit of those 20,000 indigent Indians? Fat chance! One of the leaders of this tax scam is the felon Rodney Morrison.

Morrison was accused and later acquitted of murdering an associate, but was convicted of fraud. When he was indicted he had no problem posting bond: "Mr. Morrison, who married into the Poospatuck tribe, is appealing the conviction. The Congressional report said that Mr. Morrison’s wealth, built from cigarette profits, had become so vast that he offered $54 million in assets to secure his bond."

So, while the state and its citizens take a bath in red ink, the Rodney Morrisons are free to continue to rip us off-while all the while the governor is talking tough to the legislature while hiding under his desk when it comes to facing off against the real tough guys who are running a profitable smuggling operation right out in the open. Making a total mockery of the rule of law.


As the NY Post editorialized last week, all eyes are on Paterson: "On the other hand, Paterson, who is struggling with record-low poll ratings as he prepares to run for governor, has little to lose by acting responsibly. Here's hoping he can knock some sense into lawmakers -- and set the state back on the road to budget stability. OK, that will take a miracle. But if he fails, it may require nothing less to stave off fiscal disaster."

It is now time for this jig to be up-and the Post should have alluded to the fact that Paterson has avoided enforcing the state's tax laws in its advice column to the governor. How does our state's chief executive allow tax scofflaws who are siphoning off billions a year to continue with their scamming?

Our advice to the governor? Start acting like a real chief executive. Don't you dare cut any essential services while hundreds of millions of dollars remain uncollected because of your nonfeasance. It's time for the legislature to draw a line in the sand-and put an end to the law breaking criminal empire of a small band of brigands masquerading as oppressed indigenous people.

Update

The collection of taxes on the sale of Indian cigarettes is included in the 76 page budget blueprint releases today that was just forwarded to us by E. J. McMahon, the director of The Empire Center for New York State Policy. As it says, rather conservatively in our view: "It is also estimated that the state could raise $1.1 billion over the next three years by imposing state taxes on sales to non-Indians on Indian reservations..."