No tax hikes this session
On Monday, May 17, the Minnesota legislature announced they have agreed on a $52 billion budget for the next biennium. As reported by the Star Tribune, The leaders of the…
There are a couple of reasons why tobacco tax hikes are unappealing as a solution to reducing tobacco use. For one, as we have shown, tax hikes on tobacco do not have a significant impact on tobacco use. Additionally, tobacco tax hikes hurt the poor since the tax is regressive.
Generally, this is because of two reasons:
When we look at Minnesota, in 2018, individuals who earned $35,000 or less had a smoking rate of 24.4 percent compared to 8.7 percent for individuals 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 so, in 2021 Minnesota tax Incidence Report, the Minnesota Department of Revenue noted that in 2018, cigarette and tobacco taxes were one of the most regressive taxes. Households in the 1st 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 highest incomes.
Figure 2: Effective tax rates by decile
Source: Minnesota Department of Revenue
Currently in Minnesota, the tax rate per pack of cigarettes is $3.673–– $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 — $35,000 household income — will spend 5.4 percent of their income on cigarette taxes while high-income smokers –– $75,000 household income –– will spend 2.5 percent of their income on cigarette taxes.
Given the fact that nicotine addicts –– who are more likely have low-income –– are less likely to respond to tax hikes, low-income Minnesotans will be hurt significantly more by the tax increase.