Minnesota’s Economic News — W/E 1/28/22
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Most citizens would be alarmed to learn how big of a problem cigarette smuggling represents in states with high cigarette taxes like Minnesota. Many realize the state’s taxes on cigarettes rank among the highest in the nation at $3.59 per pack. But how many understand that Minnesota has one of the highest rates of cigarette smuggling in the country and the criminal element that comes with it?
The trend recently caught the attention of the Pioneer Press.
Officials say smugglers have been bringing in tobacco products by the truckload from Indiana, where the tax is one-fourth of what Minnesota charges. They sell the products here to wholesalers and retailers and on the black market, and the tax is never collected.
But the Minnesota Department of Revenue has ramped up efforts to deter the sale of untaxed tobacco by partnering with law-enforcement agencies and cracking down on local businesses selling the products.
Much of their focus has been on the east metro. Five major busts have occurred near the St. Croix Weigh Station on Interstate 94 in Lakeland since 2016.
Last year Minnesota took in half a billion dollars from cigarette taxes. Yet the Tax Foundation and Mackinac Center for Public Policy estimate the state loses out on a staggering $297 million in additional taxes lost to smuggling driven by the state’s cigarette taxes.
The group’s long-running study on cigarette tax avoidance and evasion lists Minnesota as the state with the sixth worst smuggling problem with one in three packs sold over the counter coming from other states with far lower taxes.
Michael Lefaive, co-author of the authoritative study, warned Minnesota legislators that increasing cigarette taxes by 130 percent in 2013 would be counterproductive.
Lawmakers need to recognize that people are not sheep lining up to be sheared. They will look for lower-cost alternatives to products they like. Many will avoid or evade taxes for personal consumption. Others will smuggle cigarettes to capture a portion of huge profits that are to be made in the trade.
Now officials hope to get the public’s help in their efforts to crack down on smuggling by reporting violations.
Said Hodsdon [the prosecutor who has been handling the tobacco cases in Washington County]: “It’s really obvious if you walk into any tobacco place, and you see the cigarette packages sitting on the shelf. If they don’t have a Minnesota stamp, you know right away they are illegal.”
Hodsdon said he hopes members of the public will help investigators by reporting wholesalers and retailers selling untaxed tobacco products.
“These men wouldn’t be committing these crimes if there weren’t wholesalers and retailers also willing to break the law by selling untaxed tobacco,” he said. “Clerks know when product comes in from legitimate tobacco distributors and when it comes in from the back of a Sienna van or a Penske truck. If good whistleblower citizens assist local law enforcement, I’m sure they would be happy to hear what they have to say.”
But Lafaive puts the onus for the problem–and the fix–squarely on state legislators.
Minnesota lawmakers have encouraged this illicit activity with poor tax policy, a policy they were warned would result in a raft of negative consequences.