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Higher taxes on cigarettes encourage smuggling.
At 35.77 percent, Minnesota has the nation’s fifth highest level of cigarettes smuggled in from out of state, according to the Tax Foundation. Between 2006 and 2018 that number has grown by 52 percent. The reason? Excise tax rates. During that same period, our state’s excise tax rates on cigarettes have grown by 142 percent.
In 2013, Minnesota raised excise tax rates on cigarettes in order to deter smoking. Evidence points to decreased smoking activity due to high prices from the tax policy, but an increase in smuggling is likely one result policymakers did not take into consideration when crafting this tax policy. Incentives matter in policymaking.
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, which is potentially something 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 today to help address the state’s current budget deficit.
There are other issues associated with smuggling. Smugglers tend to be people who are already involved in well-established smuggling networks and organized crime. Additionally, smuggled cigarettes may potentially not adhere to health standards, and they hurt legitimate businesses that cannot compete with smugglers who don’t pay the cigarettes’ high taxes.