The Unintended Consequences of MN’s High Cigarette Taxes

The law of the unintended but absolutely predictable consequences of government action has struck again on the Minnesota-Wisconsin border. Washington County authorities have charged two Illinois men with smuggling cigarettes into the state in a case scheduled to go to court this week.

Mohammad Abdul Majid and Iman Ugurlu, both of Illinois, were charged last month with felony-level aiding and abetting in the sale of untaxed tobacco and another felony count of aggravated forgery for allegedly transporting more than $78,000 in cigarettes from Wisconsin to Minnesota.

They were charged in Washington County District Court via warrant Feb. 9. They are scheduled to make their first court appearance March 9.

A total of $3.59 in taxes on each pack of smokes sold in Minnesota provides a lucrative incentive that’s led to a thriving black market in the state.

The case illustrates why Minnesota now ranks fifth nationally in illicit cigarette sales, up from sixteenth place in the last such rankings compiled by the Tax Foundation and Mackinac Center for Public Policy.

The trooper grew suspicious after reviewing their truck rental agreement, which originated roughly 100 miles away from Beloit in suburban Chicago, the complaint said.

Authorities seized the tobacco loaded in the back of the 2,600 pound Penske truck after the trooper followed the men to the inspection station.

An investigation found the Beloit warehouse’s address led to a bar and grill. The delivery address in Hudson is an intersection between a Goodwill and auto body shop on Coulee Road.

Neither company was listed as licensed tobacco distributors in Minnesota or Wisconsin, the complaint said.

Authorities estimated the taxable amount of the tobacco to be about more than $74,000. Minnesota taxes tobacco products at 95 percent of the wholesale value.

No one should be surprised by this latest in a series of arrests involving alleged cigarette smuggling in Minnesota. The reality is imposing taxes that effectively double the cost of a product create a big incentive to avoid paying that tax like it or not.

In Minnesota, possessing, distributing or selling 20,000 unstamped packs of cigarettes — or an unpaid tax value greater than $1,400 — is a felony.

Black market vendors typically sell unmarked, or untaxed, cigarettes from low-tax states to high-tax states. Other times, they skirt paying federal and state excise taxes altogether by counterfeiting brand-name cigarettes.

Stores that buy unmarked tobacco products can then charge normal prices on tobacco and pocket the remainder.

In fact, Mackinac Center Fiscal Policy Director Michael LaFaive warned Minnesota legislators increasing the excise tax on cigarettes by $1.60 per pack in 2013 would lead to more smuggling. With Minnesota’s cigarette taxes now indexed to inflation, smuggled cigarettes account for about one-third of the smokes consumed in this state, according to latest estimates.