ALBANY — Cigarette taxes imposed in New York will become the nation's highest under a

measure approved Monday by the state Legislature, and the state will end two decades of debate

by requiring the collection of taxes on cigarette sales by Indian retailers.

The moves against the tobacco industry and Indian cigarette merchants were driven by a

revenue-finding frenzy — in this case, $440 million worth of added tax receipts —

by Gov. David A. Paterson and the Legislature trying to close the state's deficit.

The state's excise tax on cigarettes will rise on July 1 by $1.60 per pack, to $4.35. It

also sharply raises the levy to various levels, based on weight or wholesale prices, on

cigars, snuff, chewing tobacco and pipe tobacco. "Little cigars," growing in popularity with

teenagers, will be taxed like cigarettes.

The legislation will permit the state to start collecting taxes on Indian cigarette sales

on Sept. 1, a move the state has threatened during the administrations of the past four

governors. But critics said the bill includes a loophole to make it easier for Indian tribes

including the Seneca Nation, the nation's largest Native American seller of tax-free

cigarettes, to seek redress in federal courts.

The bill also does not end tax-free Indian sales of non-cigarette tobacco products, such

as cigars, and also does not cover gasoline sales. It also could make it easier, and more

lucrative with the hike in cigarette taxes, for Indian businesses to manufacture and sell

tax-free their own brand of cigarettes, an increasingly popular route in New York.

Talks Monday on achieving a final, overall state budget deal slowed, but lawmakers kept

insisting the 2010 budget can be wrapped up this week. Major issues that remain include state

aid levels to public schools and whether property tax relief efforts can begin.

The delay in a final deal is providing lobbying time for stakeholders to try to either

reduce cuts to their programs or avoid new taxation slapped on their industries.

Even state agencies were getting in the act. The Board of Regents Tuesday will approve a

contingency plan to cancel some statewide, annual standardized tests — including

possibly social studies exams for fifth- and eighth-graders and Regents' tests administered in

January — unless the state comes through with at least $7 million in funding.

The state university system also found itself facing stronger public opposition in its

major effort to relax some state controls over it and let it raise tuition annually and keep

more of the tuition proceeds to benefit campus programs instead of the proceeds going to the

state's general funds.

Assembly Speaker Sheldon Silver, repeating the concerns of some of his fellow Democrats,

said the plan, pushed heavily by the University at Buffalo, would harm poor students.

"We'd love to give it up if it was reasonable and if we knew that poor students were

protected," Silver said of criticisms that some lawmakers don't want to give up control over

the SUNY system.

The SUNY issue is just one of dozens of major matters on the table as lawmakers try to

juggle wrapping up the budget in the next week or so and completing non-fiscal bills before

ending their 2010 session.

The Senate later Monday was set to approve a bill already passed Friday that includes more

than $20 billion in various transportation and economic development programs. In 12 weekly

emergency bills since the April 1 fiscal year start, about 70 percent of the budget already

has been passed.

On the tobacco front, supporters said the higher taxes and Indian tax collection effort will

be a public health benefit by reducing the number of smokers by tens of thousands of people

while bringing New York sorely needed tax revenues.

"I think this is potentially Governor Paterson's greatest legacy. Governor Paterson has

achieved what previous governors could not: a real plan to finally enforce our tax laws," said

Sen. Jeff Klein, a Bronx Democrat and longtime Indian tax collection supporter.

Seneca leaders took a different view.

"This is nothing less than a deliberate effort to sabotage our federal treaty rights and

rape our economy to bail out New York State. Governor Paterson and members of the state

Legislature should be ashamed of themselves for looting our economy because they've squandered

theirs through overspending and poor management," Seneca President Barry Snyder Sr. said in a

statement.

Snyder said 3,000 Seneca and non-Indian employees of Seneca-owned tobacco businesses risk

losing their jobs if the tax is collected.

The state has tried to collect the taxes since the early 1990s. It's most serious effort,

in 1995, led to a retreat following violence along the Thruway during a protest by Native

Americans. One Seneca leader, J.C. Seneca, told The Buffalo News Friday that the collection

plan represents "an act of war" between the state and Indian tribes.

Not all tax collection advocates were pleased. Altria Group, which owns tobacco giant

Philip Morris, and others had a small army of lobbyists at the Capitol Monday trying to get

amendments into the bill to ensure the Indian tax collections occur.

They raised concerns that 115 words buried in the bill create a loophole for the governor

to settle any current or future federal lawsuits with Indian tribes without legislative

approval that could lead to different collection efforts across the state. A draft document of

a proposed court settlement with the state, for instance, would permit the Oneida Indian

Nation in Central New York to make their own cigarettes and sell them tax-free.

Morgan Hook, a Paterson spokesman, said the draft Oneida document "is not worth the paper

it's printed on" and is not part of any agreement with Paterson. He said the governor would

not enter into any deals with tribes not beneficial to the state and localities.

Industry groups and some lawmakers voiced concern that the state will hike cigarettes by

$1.60 per pack and will not, in the end, collect on the Indian sales, thereby giving Indian

merchants a $43.25 per carton pricing advantage over non-Indian retailers just on excise

taxes.

"This is an old trick," said Assemblyman James Hayes, R-Amherst, told his colleagues during

a floor debate. He said governors for years, and as recently as 2008, have put revenue

estimates on Indian tax collections into state budgets as a way to increase spending only to

then back down on the collection effort.

But Assembly Ways and Means Chairman Herman Farrell, a Manhattan Democrat, said the new

effort has been crafted in a way to ensure collection by Sept. 1.

"It will be implemented because we need the money. We think this one will work," Farrell

said on the Assembly floor.

Some Republican lawmakers raised concerns about smokers going to border states, such as

Pennsylvania, where the per pack excise tax is $1.60, which is $2.75 per pack below what New

York will charge come July 1.

Then there were the violence threats. Sen. George Maziarz, R-Newfane, talked of a "clash

of cultures" on Sept. 1 if the state pursues the Indian tax collections.

"I suspect, and hope that I'm wrong, that there will be violence, and may be people that

will get hurt," he said of predicted clashes between law enforcement and Indian protesters. In

1995, the Thruway was shut by Indian protesters, and police and Indians were injured during

violent clashes when the state last tried to collect the tax.

Besides the cigarette tax increase, taxes on tobacco products including cigars will rise

from 46 percent of the wholesale price to 75 percent. Snuff and chewing tobacco, taxed by

weight, would more than double to $2 per ounce.

James Calvin, executive director of a trade group representing convenience stores,

worried the state will not end up collecting taxes on Indian cigarettes and is then, with the

$1.60 per pack hike, just giving more reasons for smokers to avoid retailers who must charge

the tax. "Is there anything else in the world that can be taxed in New York state other than

tobacco to address this budget situation?'' he said.

But health groups said the higher tobacco taxes will reduce adult smoking levels by more

than 100,000 people, and keep especially price sensitive teenagers from taking up smoking in

the first place. "It's going to have a great impact,'' said Julianne Hart, director of

advocacy for the American Heart Association in New York.

Like other health advocates, Hart hopes the state does collect the taxes on Indian sales.

"Clearly, we've been down this road before," she said. "Hopefully, they'll follow through

this time."