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Minnesota had the fifth highest level of cigarette smuggling in the US in 2018

Earlier today the Tax Foundation published a report regarding the effect of high excise tax rates on tobacco. And according to the report findings:

Excessive tax rates on cigarettes in some states induce substantial black and gray market movement of tobacco products into high-tax states from low-tax states or foreign sources.

This is evidenced by the fact that states with higher excise taxes on cigarettes experience higher inbound smuggling activity while states with low excise taxes experience higher outbound smuggling activity. According to the Tax Foundation.

New York has the highest inbound smuggling activity, with an estimated 53.2 percent of cigarettes consumed in the state deriving from smuggled sources in 2018. New York is followed by California (47.7 percent of consumption smuggled), Washington (40.1 percent), New Mexico (36 percent), and Minnesota (35.8 percent).

New Hampshire has the highest level of outbound smuggling at 66.8 percent of consumption, likely due to its relatively low tax rates and proximity to high-tax states in the northeastern United States. Following New Hampshire is Idaho (27.4 percent outbound smuggling), Wyoming (23.1 percent), Virginia (22.8 percent), and North Dakota (20 percent).

Rhode Island, following a cigarette tax increase from $3.75 to $4.25 in the Summer of 2017, has seen a significant increase in smuggling into the state, moving it from a ranking of 18th to 8th highest inflow of cigarettes in the U.S.

Cigarette smuggling by state

In 2018, Minnesota had 35.77% of its cigarettes smuggled from out of state.  The state ranked 5th highest for the level of smuggling activity in the nation for 2018.

Accordingly so, Minnesota`s excise tax rate on cigarettes is the fifth highest in the nation. Additionally, has experienced a 52% increase in its smuggling activity between 2006 and 2018. Coincidentally, excise tax rates have grown 142% during this same period.

Incentives matter

In 2013, Minnesota raised excise tax rates on cigarettes in order to deter smoking. And while evidence points to a decreased smoking activity due to high prices from the tax policy, an increase in smuggling is potentially one result policymakers did not take into consideration when crafting this tax policy. But incentives matter in policymaking. And policymakers should have known that a tax policy that gives such a high-profit to smugglers would incentivize smuggling activity.

This increase in smuggling is bad for Minnesota in a number of ways. First, Minnesota loses potential tax revenue. This loss goes up the higher the level of smuggling. But this is potentially something that the Minnesota government did not care about, given that the intention behind the policy was to deter smoking. However, the revenue would come in handy with the state facing the current budget deficit.

Additionally, apart from the loss of revenue, there are other issues associated with smuggling. Underground markets have the potential to pose threat to the safety and health of consumers. Smugglers tend to be people that are already involved in well-established smuggling networks. And these people are involved in far more dangerous things like organized crime. Additionally, smuggled cigarettes may potentially not adhere to health standards. Furthermore, increased levels of smuggling hurt legitimate businesses that cannot compete with potentially lower prices.

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