Tobacco taxes fall heaviest on the poor
There are several reasons why taxes are a problematic solution for reducing tobacco use. For one, as American Experiment has shown, raising taxes on tobacco products does not have a significant impact on tobacco use. Additionally, raising taxes on tobacco tends to hurt the poor, generally for two reasons:
- Tobacco taxes are levied on consumption, and low-income individuals spend a higher proportion of their incomes on consumer products.
- Low-income individuals consume cigarettes at disproportionately higher rates compared to high-income individuals. They also use cigarettes more frequently or with higher intensity.
Looking at Minnesota, in 2018, nearly a quarter (24.4 percent) of individuals who earned $35,000 or less smoked, compared to 8.7 percent of those with household incomes of $75,000 or more. Additionally, 4.1 percent of smokers with incomes over $75,000 smoked 21-plus cigarettes a day compared to 8.1 percent of smokers with $35,000 or less.
Figure 1: Smoking rates by income level
Source: Minnesota Adult Tobacco Survey, 2018
Unsurprisingly, the Minnesota Department of Revenue’s Tax Incidence Report noted that in 2018, cigarette and tobacco taxes were one of the most regressive taxes. Households in the first income decile, i.e., the tenth with the lowest incomes, paid an effective rate of 2.77% on cigarette and tobacco taxes compared to the 0.05% paid by households in the top income decile — the tenth with the highest incomes.
Figure 2: Effective tax rates by decile
Source: Minnesota Department of Revenue
What a $1.50 cigarette tax will mean
Currently, the tax rate per pack of cigarettes in Minnesota is $3.673 — a $3.04 excise tax plus a $.633 sales tax. At the current rate, a person with $35,000 in income smoking one pack a day effectively spends 3.8 percent of their total income in cigarette taxes. This is more than two times the rate paid by a person with $75,000 in household income — 1.8 percent.
If the tax goes up by $1.50, per the bill passed in the Minnesota House Division, low-income smokers will spend 5.4 percent of their income on cigarette taxes. On the other hand, high-income smokers will spend 2.5 percent of their income on cigarette taxes.
Nicotine addicts tend to be poor and are less likely to respond to the proposed tax hike. Consequently, low-income Minnesotans will bear the brunt of the tax hike currently under consideration.