Minnesota’s Economic News — W/E 12/8/23
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Tobacco taxes hurt low-income Minnesotans, small businesses.
Progressive policymakers seem to love increasing tobacco taxes even though they don’t deter smokers from smoking, unfairly target low-income Minnesotans, hurt small businesses, and force police to invest more hours into stopping cigarette smugglers instead of catching deadly felons.
Gov. Tim Walz may have backed off his $1-per-pack tax increase this year when the state found a $1.6 billion budget surplus, but that didn’t prevent the House Preventive Health Policy Division Committee from passing a bump of $1.50 per pack. Democrats also introduced legislation to ban flavored tobacco statewide. And just because these bills never made it to the governor’s desk, it’s clear Democrats intend to wage this war on tobacco into the foreseeable future.
They believe bans and taxes discourage people like Butch Shimota from feeding their cravings, and others from picking up the habit in the first place, based on declining smoking rates following former Gov. Mark Dayton’s 130 percent increase in cigarette taxes, to $1.60 per pack.
A smoker for 29 years, Shimota, 47, distinctly remembers the Dayton tax increase. “I was absolutely pissed,” he says, and the fact that Walz proposed — and House Democrats doubled down on — more tobacco taxes “is just a joke.”
The number of smokers may have declined, but that is only part of the story. Shu-Hong Zhu, director of the Center for Research and Intervention in Tobacco Control at the University of CaliforniaSan Diego, attributed the plummeting smoking rates mainly to e-cigarettes. Chinese smoker Hon Lik, who was going through three packs a day, got scared when his father died of lung cancer, and he invented the first electronic smoking device in 2003. This runs nearly parallel to the trend of Minnesotans quitting smoking, which goes back to the late 1990s.
A Minnesota Adult Tobacco Use survey, conducted by the state Department of Health and an anti-tobacco nonprofit called ClearWay Minnesota, shows that only 14 percent of adults were smoking in 2018, the latest year covered in its analysis. That’s down from 23 percent in 1999, a drop of nearly 40 percent. It’s even more precipitous for high schoolers, according to the Minnesota Department of Health, as only three percent of students smoked cigarettes last year, compared to around 31 percent in 2000, a 90 percent decrease. Even when you account for e-cigarettes, tobacco use among high school kids fell from around 39 percent in 2000 to just over 20 percent in 2020, a 47 percent decline.
The high school stats are significant, according to the Centers for Disease Control and Prevention, as 1,600 youths smoke their first cigarette each day and nine out of 10 adult smokers started when they were 18. Like Shimota. He tells his nephews and nieces to never try cigarettes because he smoked his first one as a high school senior, caving to peer pressure. “Then it kinda just becomes a habit,” he says. “You go to a party, have three beers and a cigarette, and you get a heck of a buzz. It’s cheap and fun.”
Death and taxes
There are 480,000 Americans who die each year from smoking cigarettes, according to the CDC. That’s 1,300 a day, as smokers are 30 times more likely to succumb to cancer than nonsmokers. It’s an addiction. Addictions often defy logic and health science. And taxes. Economists Kevin Callison and Robert Kaestner found that “it will take sizable tax increases, on the order of 100 percent, to decrease adult smoking by as much as five percent.” Besides, Minnesota’s tobacco tax dollars go straight to the general fund, where they can be easily reallocated for projects unrelated to tobacco-use abatement.
Shimota, a former heavy equipment operator on residential construction projects, is a veteran on 100 percent disability today from combat-related injuries. He lives in New Market, some 30 miles south of the Twin Cities, where he does occasional handyman jobs — and spends at least $250 a month on cigarettes. That puts him right around the demographic that is hurt the most by higher prices: People who earn $35,000 a year or less.
These are the folks with a smoking rate of 24.1 percent, according to a 2018 survey by the state’s health department, compared to 8.7 percent among Minnesotans with incomes over $75,000. In 2019, half of all smokers made $25,000 or less.
This also means lower-income Minnesotans spend more of their total income, 3.8 percent, on cigarette taxes, according to the state Department of Revenue. That number will rise to 5.4 percent should House Democrats someday get their way. High-income residents, on the other hand, spend only 1.8 percent of their earnings on cigarette taxes and that would become only 2.8 percent under the House’s proposed tax hikes.
None of these numbers have any impact on Barbara Wagner, 64. The retired waitress has been smoking since she was in high school and insists a tax will never convince her to quit. “I love getting up in the morning and having a cigarette with my cup of coffee,” she says.
The best bet for Wagner and other smokers to quit would be electronic nicotine delivery systems (ENDS), such as e-cigarettes and vapes, as the University of California-San Diego showed through its research. There’s also support for this study from British health officials, who found the electronic nicotine dispensers are 95 percent less harmful.
Too bad Democrats, despite the data, prefer to raise taxes on these electronic devices, claiming they encourage young people to smoke.
Walz still wants a tax of 35 percent on vaping products such as nicotine solution and devices and a 95 percent wholesale tax on electronic devices. And House Democrats are pushing to tax e-cigarettes the same as regular cigarettes. Never mind that Minnesota already has the highest wholesale taxes in the country for vaping products.
It’s not helpful, as youth statewide are already misinformed about e-cigarettes. Only 18.2 percent of them believe e-cigarettes are less harmful than regular cigarettes.
Zhu, at the University of California-San Diego, only acknowledges that government efforts — and national campaigns that use evocative advertising to emphasize health risks — “play a role.” His research also suggests a 2009 increase in the federal tobacco tax, from 39 cents to $1.01 per pack, had a negligible effect on quitting smoking in the two years that followed, reinforcing his theory on e-cigarettes.
More taxes simply motivate smokers to find cheaper options. Shimota avoids paying tobacco taxes as much as possible by buying his cigarettes outside of Minnesota. His targets: Missouri, where the tax is only 17 cents; North Dakota, which has a tax of just 44 cents; and South Dakota, with a $1.76 tax. He doesn’t travel much, so when he’s not there to buy a bunch of cartons himself, he asks friends to pick some up for him while they’re on vacation or business trips.
Wagner usually drives to Iowa to buy her cigarettes. It’s just 15 miles to the border from her home in Austin, Minn., and she saves $20 a carton. But Wagner, as well as Shimota and his friends, are not nearly the equivalent of the black market, where 36 percent of cigarettes smoked in Minnesota are brought in illegally from other states, according to a study by the Tax Foundation and the Mackinac Center for Public Policy. That’s boosted by the 142 percent increase in excise taxes from 2006 to 2018, prompting a smuggling jump of 52 percent.
A tax hike of $1.50 per pack would push Minnesota’s total tax burden to $5.173. Subtract 44 cents, the tax in North Dakota, and Minnesota has a tax rate that’s $4.733 higher than its western neighbor. Now imagine a commercial smuggler transports 100,000 cigarettes from North Dakota to Minnesota, and sells them at a price point based on Minnesota’s tax rate. That’s a profit margin of nearly $475,000.
Richard Marianos, a former special agent in D.C. at the Bureau of Alcohol, Tobacco, Firearms and Explosives, had to assign two groups, each with 15 field agents, to focus on the smuggling industry about a decade ago, because it had become so violent and lucrative. Two agents traded guns and heroin for tobacco. Various other undercover operations revealed that smuggling even crossed international borders, with deals worth close to a million dollars in smuggling traced back to terrorists, although he declined to provide details. “Tobacco smuggling was more profitable for them than selling narcotics,” Marianos says.
With such a wide profit margin, it’s no wonder counterfeit tobacco products were flowing into America from countries as far as China, Belize and the Philippines.
For a state like Minnesota, with crime on the rise in its biggest city and economic center, increased smuggling means a further strain on our policing and criminal justice system, forcing officers to focus more on smugglers and prohibition — work that doesn’t enhance public safety. This also means increased interactions between police and citizens, a relationship that these days is already fraught, especially in urban areas.
Cuts and customers
Kevin Aldwaik knows about urban conflict. Originally from the Middle East, Aldwaik moved to the Twin Cities in 1996 and found work as a stock clerk. He opened Webber Mart, his own convenience store in north Minneapolis, in 2005. And today, even as his neighborhood struggles to contend with Minneapolis’s public safety concerns, Aldwaik’s primary fight is with tobacco taxes and regulations.
Tobacco comprises 40 percent of Webber Mart’s sales; without tobacco, he estimates the store would lose 70 percent of all sales because users buy groceries, lottery tickets, snacks and food. “It’s a domino effect,” he says.
He felt a huge impact in August 2018, when Minneapolis restricted menthol sales and other flavored tobacco to liquor stores and tobacco shops, aiming to cut youth smoking, which was already declining. That cut Aldwaik’s sales of all tobacco products by 50 percent. Additionally, he lost about $180,000 in store revenue in 2019, due to customers taking their business to Brooklyn Park and other surrounding cities. Minneapolis, meanwhile, saw tobacco shops more than double in response to the restrictions, according to city data cited in the Star Tribune. “The ban did not reduce menthol smoking,” he says. “It just made my life worse.”
It did the same for several of his workers. The loss of revenue forced him to cut back his workforce from six people to three. These jobs are not coming back.
Future tax hikes would surely become more subtraction by addition. Cigarettes and other tobacco products are the staple of the convenience industry, making up about 35 percent of all instore sales in 2020, with cigarettes around 28 percent, according to Convenience Store News, a trade publication that puts out an annual industry report. Tobacco also drives spending on other products, the report shows; therefore, tobacco taxes hurt sales of multiple commodities.
In 2013, Minnesota experienced a loss of 1,100 jobs, $110.9 million in overall activity, and $10.7 million in business and personal taxes due to Dayton’s tax hike on cigarettes, according to a study by John Dunham & Associates, a Florida consulting firm that specializes in economics and public policy. Aldwaik weathered it. Next time, it will force significant changes, similar to the flavor ban.
To the right of the counter in the Webber Mart, there’s a sign with FLAVOR BAN in big black lettering enmeshed in a circle slashed by a diagonal line. The background is dark burnt orange. Aldwaik, now often lobbying elected officials to lighten tobacco laws in the Twin Cities, wants everyone to know what’s happening, to fight back.
Just 20 minutes south in Bloomington, the city council passed a flavor ban — including menthol cigarettes — that will go into effect on Jan. 1. From then on, no more stores will receive tobacco licenses while those that sell tobacco products and close by June 30 of next year will have their licenses eliminated, an attrition toward prohibition that will surely cause additional small business and law enforcement pains.
This is a big deal when you consider that Bloomington is the state’s fifth biggest city, is home to the Mall of America, and will join Minneapolis, St. Paul and almost 20 other cities with some type of restriction on flavored tobacco. The spread of tobacco policies is becoming almost like a zombie outbreak, in which one person under the spell bites another, and then that person infects someone else, and so on, until the impact is exponential. And whenever conservatives make some progress in combating and containing this morbid movement, millions more get bit with a new ban or tax.
Martha Njolomole is an Economist at Center of the American Experiment. She earned a Master of Arts in economics at Troy University in Alabama. Martha’s upbringing in Malawi, a developing country, helped her develop a passion for contributing to research on the social and economic advancement of economically disadvantaged people.