Minnesota’s Economic News – W/E 4/16/21
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I’ve written before about how Minnesotan smokers responded to hikes in cigarette taxes. These were ostensibly intended to deter Minnesotans from smoking. Many suspect that, given that demand for cigarettes is ‘price inelastic‘, they were actually intended just to raise revenue for the state government.
But people don’t always respond to taxes the way policymakers want them to.
Not all of Minnesota’s smokers reacted to the tax hikes on cigarettes by quitting. Some people went and bought their smokes in neighboring states. And some people took to smuggling.
New research by the Mackinac Center for Public Policy finds a ‘Strong Link Between Cigarette Tax and Illegal Smuggling Rates’. This is illustrated in Figure 1. The Tax Foundation ranks each of the states and the District of Columbia by the excise tax levied on a pack of 20 cigarettes, with 1 being the lowest rate and 50 the highest. Mackinac ranks the states by the percentage of cigarettes smoked which are smuggled, with 1 going to the biggest smuggler 50 to the highest. We see quite clearly that as the tax rate on cigarettes goes up so does the amount of smuggling.
Figure 1 – Cigarette tax rates and smuggling by state
Source: The Tax Foundation, the Mackinac Center for Public Policy, and Center of the American Experiment
The Tax Foundation ranks Minnesota seventh in the nation for its cigarette taxes – $3.04 on a pack of twenty. We rank fifth in the nation for the share of cigarettes smoked here which are smuggled in from elsewhere – 35%.
Back to the Motherland
Maybe these reactions are hardwired? After all, many Minnesotans can claim Scandinavian heritage and when Norway hiked sugar taxes, many Norwegians just went and shopped over the border in Sweden.
As Christopher Snowdon writes for the Institute of Economic Affairs,
Norway has had a tax on sugary products since 1922. The Guardian says it was introduced ‘to raise revenue for the state, rather than improve the health of the nation’ as if this makes it any different from modern sugar taxes.
In January last year, the tax on chocolate and confectionery went up by 83% to the equivalent of [$4.01] per kilo. The tax on fizzy drinks – including zero-sugar drinks – works out at about [0.55 cents] a litre.
The result was predictable…
The tax increase had “quite an impact on our sales”, said Idbratt, whose giant sweet emporium is part of a booming cross-border trade that earned Swedish businesses – some owned by Norwegian investors – SEK16.6bn (£1.3bn) last year, 10% more than in 2017.
Idbratt said Gottebiten, founded by three entrepreneurial brothers in 1997, had “seen more customers, and existing customers are buying more”. Norwegian shoppers made 9.2m trips across the border last year, according to Statistics Norway.
It is a lesson of vital importance for tax policy but which policymakers all too often ignore. It is worth repeating: people don’t always respond to taxes the way policymakers want them to.
John Phelan is an economist at the Center of the American Experiment.