Tobacco Taxes: High cost, little benefit
Tobacco taxes are regressive. The poor tend to spend a higher proportion of their income on tobacco products, and they have higher rates of tobacco use than people with higher incomes. In 2018, Minnesotans with incomes of $35,000 or less had a smoking rate of 24.1 percent compared to 8.7 percent among people with incomes over $75,000. Predictably, the Minnesota Department of Revenue estimated that in 2018 individuals in the lowest population decile paid an effective tax rate of 2.77 percent on tobacco products compared to the 0.05 percent paid by individuals in the top decile.
Convenience stores in Minnesota lose when users are forced to patronize stores in other states with low taxes. After the 2013 tax hike, border communities saw, on average, a 30.1 percent decline in cigarette sales — 50 percent larger than the nationwide reduction of 19.8 percent — and a loss of about $38 million in non-tobacco products. Consequently, Minnesota experienced a loss of 1,100 jobs, $110.9 million in economic activity, and $10.7 million in business and personal taxes due to the cigarette tax hike.
Cigarette tax hikes encourage smuggling as smokers who want to avoid high taxes cross state lines to buy in low-tax states and criminal entities are incentivized to transport large quantities of cigarettes into Minnesota from low-tax states for profit. In 2018, Minnesota had the fifth highest tax rate per pack of cigarettes in the country and also ranked fifth on cigarette smuggling — 36 percent of cigarettes smoked in Minnesota were smuggled in from other states. Between 2006 and 2018 Minnesota faced a 52 percent increase in cigarette smuggling. Coincidentally, the cigarette excise tax had grown by 142 percent during the same period.
E-cigarettes and other vaping products have been found to be significantly less harmful than traditional cigarettes, and they help smokers quit using tobacco. Making these products easily accessible could help reduce cigarette smoking as well as health issues associated with smoking. Alternatively, tax hikes and prohibition endanger public health by restricting access to vaping products and pushing people into using more harmful tobacco products.
Tobacco usage rates were already falling in Minnesota before the 2013 tax hike. Cigarette use declined by 90.1 percent among high school students and 78.0 percent for middle school students between 2000 and 2020. In fact, even after accounting for e-cigarettes, reported use of tobacco products among youths was significantly down in 2020 — 20.5 percent among high school students and 4.1 percent among middle school — compared to 2000, when it was 38.7 percent among high school students and 12.6 percent among middle schoolers.
Tax hikes have very little impact on tobacco use. This is because regular and long-term use is much more common among disadvantaged groups, such as people with mental health is- sues or low socioeconomic status, who are less likely to be deterred by high prices and therefore more likely to keep using tobacco. People with mental illnesses are two times more inclined to smoke than the average Minnesotan.
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