History suggests increasing Minnesota cigarette tax won't be as lucrative for state as some think
In a commentary published in the Star Tribune today, economist Patrick Fleenor of Fiscal Economics Inc. makes a persuasive case that the state stands to gain less than lawmakers think from a GOP-proposed cigarette tax hike.
Minnesota's cigarette tax is currently near the national average, but the GOP proposal would raise the per-pack tax from $1.23 to more $2.52 per pack. That could amount to as much as $320 million annually for the state -- if people buy cigarettes legally.
And therein lies the problem, Fleenor argues. History shows that when Minnesota's cigarette taxes get out of whack with the rest of the country, people start smuggling cigarettes. And when people start smuggling cigarettes, taxed sales drop.
Minnesota had some of the highest cigarettes taxes in the mid-1950s, by which time the sale of legal, tax-paid cigarettes had plunged 20 percent below the national level. With taxes remaining high, by the mid-1970s, nearly 15 percent of the cigarettes consumed in the state were the product of bootlegging.
Legislators changed their approach, let inflation catch up with tax, and by the mid-1980s sales of legal cigs were at record levels. But sure enough, from the early '90s onward the tax has been rising, and guess what? A 2009 report commissioned by the Department of Revenue found that the state government loses millions of dollars annually to cigarette tax evasion. Those losses -- and the amount of illegal black-market activity happening in the state -- will almost surely increase if the GOP-proposed tax increase becomes law.
Of course, proponents of higher cigarette taxes often have more than purely financial motives. For instance, most would agree that the billions of dollars smoking costs Minnesota each year in health care expenses and lost productivity can't be ignored, and presumably higher taxes would result in at least some people quitting.
Furthermore, according to the American Cancer Society, youth smoking rates drop by 6.5 percent for every 10 percent increase in the price of a pack of cigarettes. So a tax hike might result in some lifelong smokers never sucking down that first cig to begin with.
But will doubling the cigarette tax rake in $320 million for the state? History suggests that it won't. So in the interest of speaking the truth, politicians probably shouldn't cite that number as a good reason to make life more expensive for Minnesota smokers.
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