Gov. Walz’s budget proposals are still bad
When Gov. Walz unveiled his proposed budget for the 2022-2023 biennium in January, I wrote that the proposals were “horrible.” Yesterday, he unveiled a revised two-year budget taking into account…
On Wednesday, a Minnesota House division approved a bill that would raise taxes on cigarettes, cigars, and tobacco products. Indeed, if it becomes law, this bill would increase the tax on a pack of cigarettes by $1.50, bringing the total excise tax to $4.54 per pack. Using the Tax Foundation’s numbers for 2019, that would give Minnesota the highest rate of cigarette taxes in the United States.
This hike gives the lie to Gov. Walz’ notion that his proposed tax hikes will only hit the rich. The Department of Revenue’s 2021 Minnesota Tax Incidence Study finds that “The two most regressive taxes are lawful gambling and the cigarette and tobacco taxes.” MPR News reports:
The DFL governor concedes that taxes aimed at smoking and vaping are regressive, meaning that they disproportionately hit low-income earners, but Walz made it clear last week that his proposed increases on smoking and vaping are all about public health.
“We use the tax code to either incentivize or dis-incentivize behaviors,” Walz said. “That’s nothing surprising. And we’re trying to do that.”
This is a welcome acknowledgment of the oft-forgotten fact that tax rates are incentives and that if you change incentives you change behaviors.
But to what extent? That depends on how ‘price elastic‘ the demand for cigarettes is, ie, by how much does demand for cigarettes fall – if at all – consequent to a given hike in price. If the price of butter goes up, for example, you can switch to margarine (they are substitute goods) so demand is said to be relatively ‘price elastic’.
That is not the case so much with cigarettes. Speaking as an ex-smoker, if the price goes up a little bit you simply pay it, up to a point, because you are addicted. But this doesn’t mean that demand for cigarettes is price inelastic, it simply means that if you want to use taxes to stop smoking you have to hike them considerably and in one go.
This is pretty much what the empirical literature finds. As I’ve written before, a 2012 paper for the NBER by economists Kevin Callison and Robert Kaestner asked the question ‘Do Higher Tobacco Taxes Reduce Adult Smoking?‘. They found that:
Estimates indicate that, for adults, the association between cigarette taxes and either smoking participation or smoking intensity is negative, small and not usually statistically significant. Our evidence suggests that increases in cigarette taxes are associated with small decreases in cigarette consumption and that it will take sizable tax increases, on the order of 100%, to decrease adult smoking by as much as 5%.
It is important to note, too, that reducing the consumption of cigarettes purchased in Minnesota is not the same thing as reducing the consumption of cigarettes smoked in Minnesota. Evidence shows that higher rates of cigarette tax cause are associated with higher rates of cigarette smuggling, although it makes little sense to talk about smuggling in a free trade area like the United States.
So, this proposed tax hike will be regressive but, at 49%, is not of a magnitude likely to have much impact on cigarette consumption. More revenue for the governments of Minnesota and its neighbors is more likely to be result than greatly reduced smoking.
John Phelan is an economist at the Center of the American Experiment.