The problem with raising revenue from cigarettes that we want people to stop smoking
From: Fiscal Fitness, the blog of the Minnesota Center for Fiscal Excellence
By Mark Haveman
Our recent blog post discussing one example of the unintended consequences of trying to modify personal behavior through the tax code made us wonder how Minnesota’s own big experiment along those lines was working out: our major increase in cigarette taxation.
As you may remember, policymakers increased both cigarette excise and wholesale taxes during the 2013 legislative session. The new combined excise/wholesale rates more than doubled the old rates and were projected to bring in approximately $400 million in additional general fund revenue. Yet many claimed the new revenues — so essential to balancing the FY 2014-15 budget — were a byproduct of the real policy motivation: getting people to stop smoking. Whether you believe such claims were sincere, disingenuous, or a little of both, the fact is this decision was based on the win/win proposition of being able to raise considerable general fund revenue and achieve a social purpose at the same time.
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Then there is this rather remarkable finding from a recent report that came across our desk that was funded by a group of cigarette wholesalers and retailers. It examines the economic consequences of the 2013 cigarette tax increase and suggests that while cigarette consumption may have staying power, Minnesota’s cigarette tax collections may not. According to the report, based on store-level data, per capita cigarette sales in Minnesota border regions, already feeling the effects of existing border differentials, “collapsed” with the increase — down 42% along the North Dakota and Iowa borders, 35% along the South Dakota border and 27% along the Wisconsin border. Meanwhile, border state sales in counties near several larger Minnesota cities increased over 60%. We’ve reproduced a figure from the study below that shows this change.
Even Minnesota’s interior “pink” region — featuring per capita sales declines of 8%- 30% — may entail a much more complicated narrative. As the report notes, consumers have many alternative sources to more traditional outlets for cigarettes and tobacco products, including overseas counterfeit vendors, Native American smoke shops (where the tax issue has been problematic for decades), and illegal smuggling which the Department of Revenue has called “the obvious wild card.”
