History suggests increasing Minnesota cigarette tax won't be as lucrative for state as some think

Categories: Taxes
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Doubling cig taxes may reduce smoking, but it won't necessarily produce a cash infusion for the state.
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.

Related coverage:
-- In unusual move, GOP legislators propose tax increase
-- American Lung Association: Minnesota should do more to prevent smoking

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20 comments
amiller92
amiller92

Since when is Mr. Rupar the arbiter of opinion, and why does he get to decide what's "persuasive?"  

The comparison to the 1950s is misleading.  The current proposal is to match our neighbors, not surpass them.  And that's what Fleenor conveniently leaves out of his analysis.  It's not "taxes" that create smuggling.  It's taxes that aren't uniform.

And, of course, the whole premise here is a straw man.  This isn't being pushed primarily as a means of generating revenue.  It's a means of reducing smoking, that will also generate revenue.  That the revenue might be a little less isn't really a problem.

The Raise It For Health folks like to talk about kids who won't begin smoking, which is right but I think sometimes hard to understand.  What more expensive cigarettes mean is that people who don't have excess discretionary income -- like young people -- won't be able to smoke at all or as much.  That's good for those people's health, and it's good for the state's and everyone else's pocket book in reducing the related health care costs.

MrE85
MrE85

Point of clarification: the Star Tribune did not author this opinion piece. It was written by Patrick Fleenor, who describes himself as "chief economist of Fiscal Economics Inc," a Alexandia, VA firm. Fleenor seems to be closely associated with a number of "think tanks" that promote a anti-tax message, including the Cato Institute, which published his book.

It is Fleenor's (and those who pay his salary) views being expressed, not the Star Tribune. So consider the source, before you buy the message.

On that point, full disclosure: I'm the communications director of the American Lung Association in Minnesota, a group that supports increasing the cigarette tax in Minnesota.

Mn Worker
Mn Worker

Try cutting spending by 5% across all state departments first. That will probably save more.

The repubs are really stupid. 20% of the adults smoke in this state. If you want to hold the majority wake up and smell the coffee (and cigs). jeeessh!

HotLunch
HotLunch

"Young people" are the largest group with discretionary funds, think about it.

People will always smoke; a tax increase will do little to curb smoking (many cities with higher cig taxes have a much higher incidence of smokers than theTC's). It's all about the money and always has been.

Lastly, if you want to ride on the cool scene, try being progressive instead of regressive.

BHO
BHO

So you get paid six figures to be anit-smoking. Another elitist snob! Looking to increase cigarettte taxes to line your pockets?

GovForce
GovForce

Statism

"The political expression of altruism is collectivism or statism, which holdsthat man’s life and work belong to the state—to society, to the group, thegang, the race, the nation—and that the state may dispose of him in any way itpleases for the sake of whatever it deems to be its own tribal, collectivegood." -Rand 

atrupar
atrupar

Thanks for that, Bob -- my bad. I've edited to clarify the source. 

MrE85
MrE85

Actually, the adult smoking rate in MN is 14.9 percent. However, research has shown that higher costs per pack work best in reducing youth smoking. Sadly, once many adults are hooked, they willl pay any price for a pack of cigs.

amiller92
amiller92

I'm thinking about it.  And I'm not getting how "young people" and here we are talking about teenagers, which is when people start smoking, are the largest group with discretionary income.  I can't think of any way of measuring discretionary income that makes that true.  I can't think of any way that actually become true even if we take "young people" to mean people under 25 or 35 or whatever.  It's pretty well understood that older people have higher discretionary income.

But I don't think you're right about "much higher" incidence of smoking in "many cities" with higher cigarette taxes.  Nor do I think that anyone is claiming that taxes are the only variable that determines smoking rates.  The claim is that all else equal, higher taxes means less smoking, a fact that not even Mr. Fleenor disputes.

amiller92
amiller92

Yes, those darn elitist snobs who don't want you to get lung cancer.  I hate those people.

MrE85
MrE85

"A heavy smoker, Rand underwent surgery for lung cancer in 1974"--Wikipedia

Research
Research

$50 for a nice rolling machine.  $20 for a bag of better quality tobacco than major brands.  About $1.50 a pack.  That's how I roll and only smoke about a pack a week.  For some who smoke half a pack or more daily, this alternative is worth trying.  Nicoderm patches work too.  I just never really wanted to fully quit.

HotLunch
HotLunch

Another $1.25 a pack will effect demand very little. If anything, demand will shift to "roll your own" and black market cigs. The state could potentially lose out on revenue.

Sure, smoking is more condusive to that hectic, fast paced East Coast lifestyle, but none the less cigs are still $13 a pack in NYC with much more users per capita. As much as you want it to, smoking will never die. Also, their are far better ways to deal with budget issues than another unnecessary tax. Progression, not regression.

amiller92
amiller92

Have you? They are a little higher, but taxes are hardly the only variable, as I said above.

You can deny it all you want, but every study I've seen says Pigouvian taxes work -- the reduce the unwanted behavior and raise funds. If you've got something that contradicts that, feel free to share it.

HotLunch
HotLunch

No need to deflect. If we embrace when we're wrong, we learn.

Checked East Coast stats yet?

amiller92
amiller92

And parents are going to give then more allowance to pay for more expensive cigarettes? Or they are going to work full time? That's the definition of constrained discretionary income.

You might want to try that course again.

HotLunch
HotLunch

Teens have pt jobs or get an allowance. They have virtually no bills or responsibilities, hence virtually all of their income is discretionary. Econ 101.

Look at rates of smoking on the East Coast vs here.

amiller92
amiller92

Bob - Didn't she also get public assistance to pay for it?

GovForce
GovForce

"Government control of a country’s economy—any kind or degree of such control,by any group, for any purpose whatsoever—rests on the basic principle ofstatism, the principle that man’s life belongs to the state." -Rand *cough**cough*

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