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Cigarette smuggling has soared since Minnesota imposed a $1.60 per pack excise tax increase in 2013, propelling the state to fifth highest for the crime in a new Tax Foundation and Mackinac Center for Public Policy report.
The study shows smuggled smokes accounted for more than a third of cigarettes–36 percent–consumed in Minnesota in 2014, leading to an estimated $313 million loss in revenue due to tax evasion and avoidance by so-called border shopping.
“Minnesota’s big leap in the ranks of smuggling states is no surprise,” said Michael LaFaive, Mackinac Center Fiscal Policy Director and co-author of the report. “As tax differentials increase between states, so too does the opportunity make or save a buck.”
The results come as the Dayton Administration seeks to ramp up efforts to combat cigarette smuggling in the tax bill introduced this week.
“The department cannot verify the findings of this study,” said Ryan Brown, Department of Revenue spokesman. “We will continue to focus enforcement activities on those who attempt to evade the cigarette tax and will use the resources available and our partnerships with local, state, and federal entities to uniformly enforce the state’s cigarette tax laws.”
The peer-reviewed study compares the number of smokers in a state to legal sales of cigarettes, often revealing much lower sales than would be expected for the state’s smoking population. Anti-smoking groups say the gap shows higher cigarette taxes work by cutting consumption.
But the study’s authors maintain widespread cigarette smuggling accounts for most of the variance, an unintended consequence of state taxes that now total $3.59 a pack in Minnesota. The results include legally purchased cigarettes from bordering states like North Dakota, which draws many Minnesotans with a 44 cents a pack excise tax.
“The naive hope of Minnesota legislators to greatly improve health consequences is undermined by the act of smuggling they helped create,” LaFaive said. “Most people aren’t quitting, they are just acquiring their tobacco elsewhere.”
Previously Minnesota ranked 16th with an estimated cigarette smuggling rate of about 18 percent.
State officials have acknowledged Minnesota’s worsening black market, estimating in a 2009 report that the crime deprives the state of up to eight percent of cigarette excise tax collections.
In the past year and a half, Minnesota Department of Revenue investigators have publicized several cases brought against individuals involving alleged possession of unstamped or untaxed tobacco products obtained from out-of-state wholesalers and unlicensed distributors.
Overall cigarette tax collections increased from $369 million in 2013 to $575 million in 2014, but dropped back to $567 million in 2015.
But the new study concludes cutting cigarette excise taxes would be a more effective way to combat illicit cigarette sales and border shopping. Minnesota’s excise tax has increased another 17 cents per pack since 2014, due to a provision that ties the rate to inflation. The legislature passed a bill to eliminate the automatic increase last year, but the measure died on Gov. Mark Dayton’s desk.
“Consumers are not sheep lining up to be sheered and seek less expensive alternatives to products for which they have a strong preference elsewhere,” according to LaFaive. “Lower taxing jurisdictions may include North Dakota, Indian reservations or the Internet. Well-meaning consumers may actually pay full freight, not realizing they’re buying cigarettes trucked in from distant tobacco states like Virginia.”
The top five states with the highest inbound smuggling rates include New York (55 percent), Arizona (50 percent), New Mexico (46 percent), Washington (45 percent) and Minnesota (36 percent).