The MC: The Mackinac Center Blog

Smuggling Rampant in Minnesota

The unintended costs of cigarette 'sin' taxes

(Editor’s Note: This article was originally published on March 18, 2015 by Center of the American Experiment.)

Minnesota has a large smuggling problem and it is set to get worse. We estimate that the 130 percent excise tax increase on cigarettes in July 2013 raised Minnesota’s smuggling rate to 33.7 percent of the total market from a much lower 18 percent. This hike in tax evasion and avoidance is a direct function of high excise taxes — which will likely increase each year — and the ease with which consumers can acquire lower priced cigarettes places like North Dakota, Indian Reservations and the Internet.

The most efficient answer to this smuggling problem is to roll back excise taxes. Short of that the state could repeal its annual automatic tax increase and let the real price of cigarettes drift back to more rational levels. Failure to do so means that Minnesota will probably remain a top five smuggling state.

We have created a statistical model designed to measure smuggling in most U.S. states. It tells us that — at a tax of $2.90 per pack — Minnesota’s elicit market may be equal to about one-third of Minnesota’s cigarette market. It is worth noting, though, that a modicum of cross border cigarette shopping is legally allowed for Minnesotans and is swept into our model’s estimates as “smuggled.”

The large increase in illicit trafficking is a problem that has been recognized at the state capital, both by the Governor and the Legislature. A bill (SF 1192) has been introduced to minimize such lawlessness which among other items would provide for additional state auditors. This solution is unlikely to be effective because of the potential profits involved in smuggling.

Too many politicians — in Minnesota and elsewhere — point to declines in legal paid sales of cigarettes and naively shout, “See! Tax hikes are working; people are quitting.” That may be true to a degree but it is still largely naïve. A better explanation is that people are turning to the illegal cigarette market, a less expensive legal alternative (such as loose tobacco) or both.

Economist Mark Stehr’s 2004 paper in the Journal of Health Economics estimates that up to 85 percent of after-tax-hike changes to legal paid sales may be from tax avoidance, not from kicking the proverbial habit. Even then, his paper was published in 2004, when excise tax rates were generally lower.

There are several reasons why automatic and annual increases in the tax on Minnesota cigarettes is unlikely to reduce the rate of smoking. It is likely that those who still smoke have a strong preference for doing so. Tax hikes on the margin do less to help smokers quit and more to drive them to illicit markets. Second, the illicit market is easy to access. North Dakota’s 44-cent per pack excise tax makes it an ideal source state for consumers in Minnesota, as do Internet retailers and Indian reservations.

Also, people may be channeled into less expensive but possibly more dangerous alternatives, such as “roll-your-own.” Cigarettes cost much less when you buy loose tobacco and roll your own smokes.

Roll-your-own smokes might also be more dangerous because, as smokers need not include filters, they can boost the amount of nicotine they receive with each puff. Think of it as the “bathtub gin” of cigarettes. As prices rise due to Prohibition (then) or taxation (now), people work to get more bang for their buck.

These are all vital considerations because legal paid sales of cigarettes and loose tobacco have both tanked — especially in border counties — and empirical evidence has shown that most of those changes are a function of tax avoidance and evasion and not from quitting. Even the governor’s proposed budget reported that a whopping 40 percent of retailer “inspections resulted in either a seizure or assessment related to the discovery of untaxed tobacco products.”

The response to an apparent large uptick in illicit trafficking has been a proposal to add 11 auditors to the state’s complement to help better ensure against non-compliance with state excise tax laws. This is an ineffective remedy.

Federal and state prison officials elsewhere have been busted for smuggling smokes into prisons. If you can’t keep illicit smokes out of the penitentiaries how does anyone expect 11 bean counters to keep them out of a state with open borders? You could make Minnesota a veritable police state and illicit tobacco would still find its way to consumers of every age.

A better solution is to roll back the excise tax burden on tobacco, or at least stop raising it on annual basis.

Letter to the Detroit Free Press on Film Subsidies

Corporate welfare programs rarely produce net new jobs

Mitch Albom’s March 14 defense of subsidies for film makers should inspire lawmakers to end this public policy mistake. Corporate welfare programs rarely produce net new jobs, especially in light of superior alternatives.

In order to subsidize the jobs of a few “carpenters and drivers,” among others, which Albom says resulted from the program, money must first be taken from many others. The net effect is at best a wash, most likely a loss.

He claims the subsidy appropriation of “fifty million isn’t breaking the state.” The irony is palpable. It appeared next to an article arguing that Michigan doesn’t have enough money to fix its roads. Fifty million a year could fill 2.5 million potholes each year.

I do agree with Albom that the MEGA corporate welfare program offered too many large tax credits to business. But this 16 year-old program was also a proven job creation failure.

An article in The Detroit News on FOIA law reform highlighted a current Mackinac Center Legal Foundation case. The lawsuit against the Michigan Liquor Control Commission disputes a $1,500 fee being charged for an electronic transfer of an already prepared file.

“High FOIA fees read more like the thwarting of our request than a legitimate business practice,” LaFaive said. “The idea that sticking a thumb drive in the computer and clicking ‘save’ should cost $1,500 strains the bounds of credulity.”

The Mackinac Center has worked with groups like the Michigan Press Association and the ACLU to improve FOIA law in Michigan.

March 13, 2015, MichiganVotes Weekly Roll Call

Crime & punishment, film subsidies, more

Now with one click you can approve or disapprove of key votes by your legislators using the VoteSpotter smart phone app. Visit votespotter.com and download VoteSpotter today!


Senate Bill 72, Let landlords refuse rental for smoking medical marijuana: Passed 34 to 3 in the Senate

To prohibit smoking medical marijuana in a public place, or where it is banned by a private property owner. The bill would also allow a landlord to refuse to rent a residence to someone who uses medical marijuana on the property.

Who Voted “Yes” and Who Voted “No”


House Bill 4163, Ease residential lift licensure restrictions: Passed 62 to 47 in the House

To permit licensed home builders to install residential stairway lifts used by the elderly and disabled without incurring the much more rigorous licensure provisions that apply to elevator contractors. This reform has been opposed by elevator unions and incumbent sellers of expensive medical equipment to consumers.

Who Voted “Yes” and Who Voted “No”


House Bill 4069, Expand criminal defendant “youthful trainee status”: Passed 98 to 12 in the House

To make 21 to 23 year old offenders eligible for criminal defendant “youthful trainee status,” which provides a mechanism for not including the offense on a youth’s permanent record. Also, to authorize imposing conditions including a full time school, work or community service requirement.

Who Voted “Yes” and Who Voted “No”


House Bill 4135, Revise criminal defendant “youthful trainee status”: Passed 85 to 25 in the House

To require that if a young criminal is assigned to “youthful trainee status” (which prevents an offense from going on the youth’s permanent record) but then is convicted for a serious felony, the “trainee” status must be revoked, which places all the offenses on the record.

Who Voted “Yes” and Who Voted “No”


House Bill 4122, Terminate state film producer subsidies: Passed 58 to 51 in the House

To repeal the program that gives state subsidies to film producers (for which $50 million was appropriated this year). Also, to require any leftover money go to reimburse state pension funds for losses incurred under a deal made by the previous administration to back some politically well-connected individuals’ investments in a Pontiac studio. Since 2008 nearly $500 million in state tax revenue has been distributed to producers.

Who Voted “Yes” and Who Voted “No”


SOURCE: MichiganVotes.org, a free, non-partisan website created by the Mackinac Center for Public Policy, providing concise, non-partisan, plain-English descriptions of every bill and vote in the Michigan House and Senate. Please visit MichiganVotes.org.

Washington Examiner Quotes Vernuccio

Supreme Court could take up issue of agency fees

A Washington Examiner article quotes Director of Labor Policy F. Vincent Vernuccio on the subject of agency fees. In February, Illinois Gov. Bruce Rauner signed an executive order stopping the collection of union fees from the paychecks of public employees who have chosen not to be members of the union. Gov. Rauner’s decision was based in part on the Supreme Court’s ruling in Harris v. Quinn, which ended a dues skim from home healthcare workers in Illinois.

Vernuccio believes that Gov. Rauner’s order and Friedrichs v. California Teachers Association, a related lawsuit currently petitioning the Supreme Court, which Mackinac has submitted an amicus for, makes it more likely that the Supreme Court will take up the issue of agency fees.

House Vote on Terminating Michigan Film Producer Subsidies

House rejects $50 million per year program

On March 11, 2015, the Michigan House of Representatives voted 58‑51 to pull the plug on an “incentive” program that since 2008 has distributed some $500 million in state tax dollars to film-production companies.

According to the federal Bureau of Labor Statistics, Michigan had 1,663 full-time film-industry jobs in 2008, and 1,561 in 2013 (the latest year information is available), a decline of 102 jobs.

Last June, the Legislature appropriated $50 million in subsidies for the current fiscal year, which ends on Sept. 30, 2015.

The House-passed repeal bill also contains a provision requiring any leftover film subsidy money be used to reimburse state pension funds for losses from a past film-related deal. The Granholm administration had used pension money to back investments, made by some politically well-connected individuals, in the setup of a production studio in Oakland County.

2015 House Bill 4122: Repeal film producer subsidies (House Roll Call 26)

Who Voted “Yes” and Who Voted “No”

Republicans in favor:
Afendoulis, Barrett, Bizon, Bumstead, Canfield, Chatfield, Cole, Cotter, Courser, Cox, Farrington, Forlini, Franz, Gamrat, Garcia, Glenn, Goike, Graves, Heise, Hooker, Howrylak, Hughes, Iden, Inman, Jacobsen, Jenkins, Johnson, Kelly, Kesto, LaFontaine, Lauwers, Leonard, Leutheuser, Lyons, Maturen, McBroom, Miller,A, Nesbitt, Outman, Pagel, Pettalia, Poleski, Potvin, Price, Pscholka, Rendon, Roberts,B, Runestad, Somerville, Tedder, Theis, Vaupel, VerHeulen, Victory, Webber, Yonker

Republicans opposed:
Callton, Crawford, Glardon, Lucido, McCready, Sheppard

Republicans not voting:
Muxlow

Democrats in favor:
Kivela, Santana

Democrats opposed:
Banks, Brinks, Brunner, Byrd, Chang, Chirkun, Clemente, Cochran, Darany, Dianda, Dillon, Driskell, Durhal, Faris, Garrett, Gay-Dagnogo, Geiss, Greig, Greimel, Guerra, Hoadley, Hovey-Wright, Irwin, Kosowski, Lane, LaVoy, Liberati, Love, Miller,D, Moss, Neeley, Pagan, Phelps, Plawecki, Roberts,S, Robinson, Rutledge, Schor, Singh, Smiley, Talabi, Townsend, Wittenberg, Yanez, Zemke

Democrats not voting: None

Three Reasons Why Michigan Should End Film Incentives

Results show the investment is not worth it

The Michigan House recently passed House Bill 4122 which would end the state’s film incentive program. The legislation now moves on to the Senate.

But Senate Majority Leader Arlan Meekhof, R-West Olive, has raised concerns about ending the subsidy. And Gov. Rick Snyder, who previously proposed eliminating the subsidies, now says he doesn’t believe ending the program abruptly is an “appropriate answer.”

So those are the obstacles standing in the path of terminating payouts to Hollywood. The good news is that it is believed most Michigan Senators want to end the subsidies. There may end up being an agreement between the branches of state government, but they should resist the temptation to merely reduce the appropriation.

The state should cut the film incentives once and for all for three simple reasons:

1. No increase in film jobs. According to the Bureau of Labor Statistics, there are fewer film jobs in the state today than when the film incentives began in 2008.

2. No permanent jobs. According to the Michigan Film Office (which distributes the subsidies), there were zero full-time jobs created from the program last year.

3. No money. According to the Senate Fiscal Agency, the incentives bring in only 11 cents on the dollar spent — a huge loss for taxpayers.

By all fair measures, the nearly $500 million devoted to the film incentive program has been a waste. It should be ended and the money redirected to better priorities.

Excise Tax Hike on Cigarettes Irrational Choice for Washington

Fewer legal sales doesn't necessarily mean lower smoking rates

The Washington Legislature appears again poised to go to the cigarette excise tax well. A proposal to hike the state’s excise tax by another 50 cents — to $3.52 per pack — would exacerbate an already large smuggling problem and offer little in the way of gains to public health.

We have created a statistical model to measure the degree to which cigarette smuggling occurs in most American states. Through 2013, our model reported that Washington had the third-highest smuggling rate among 47 states. Our estimate shows that, of all the cigarettes consumed in Washington that year, 46.4 percent were obtained as a result of tax evasion or avoidance. The state’s smuggling rate would be four points higher if we did not subtract out cigarette smuggling exports going to Canada.

We are not the only team of scholars to tag Washington state with a very high smuggling estimate. On February 19, the National Research Council and the Institute of Medicine released its own state-by-state smuggling estimates in a report titled, “Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Contest, and Lessons from International Experiences,” in which they estimate Washington’s smuggling rate for 2012 at 45.5 percent.

In other words, two groups of analysts, working independently, made nearly identical smuggling estimates. Even if both are off by 10 or 15 percentage points Washington still has a rampant problem that could get even worse. The state’s own smuggling estimate for 2013 is 32.9 percent of the total market.

To measure the future impact of adding 50 cents per pack onto the state’s existing tax, we reran our model at the higher rate. It reports that smuggling will leap to 52.5 percent of the total market, moving Washington into second place among smuggling states, behind only New York State, whose smuggling problems are exacerbated by New York City’s municipal excise tax of $1.50 and its proximity to tobacco state Virginia.

Perhaps more instructive is that the model is informing us that Washington is getting dangerously close to the point at which revenues from a higher excise tax will turn negative. We estimate that the higher excise tax will only raise about 3.3 percent or $13.5 million more than it does now due to a drop in legal paid sales of 11.4 percent.

It is worth noting that the state’s own estimates aren’t too different. They estimate new revenues of $18 to $20 million in the year following the hike and a legal paid sales decline of 9.5 percent.

As a large percentage of Washington’s population lives along the I-5 corridor, it does not strain credulity to suggest that large amounts of illicit cigarettes are being trucked up from Oregon, which maintains an excise tax of just $1.31 per pack. We also suspect that Washington’s busy port system facilitates the illegal transit of untaxed smokes, but our model is not yet designed to measure it.

We do recognize that supporters of such tax hikes for health reasons are well intentioned, but evidence suggests that illicit sources of smokes may be undermining their goals.

In 2004, economist Mark Stehr published a paper that suggested up to 85 percent of the change in legal paid sales of cigarettes may be attributed to tax avoidance or evasion, and not from people ending their smoking habits.

The authors of a 2014 study, “Do Higher Tobacco Taxes Reduce Adult Smoking?” published in the peer-reviewed Journal of Economic Inquiry, are skeptical as well. They write: “Considering all the evidence, we conclude that there is insufficient justification for the widespread belief that raising cigarette taxes will significantly reduce cigarette consumption among adults, even young adults.”

The reasoning behind this is simple. People turn to illicit markets for cheaper (and we argue, sometimes more dangerous) alternatives and those who still smoke have a “strong preference” for doing so. Lawmakers should never confuse declines in legal paid sales with a decline in smoking rates. The former need not lead to the latter, especially to the degree health advocates hope.

By opposing a further cigarette excise tax increase, Washington legislators will avoid forcing residents to accept substantial increases in lawlessness in exchange for modest reductions in smoking rates.

Michael LaFaive is director of fiscal policy with the Mackinac Center for Public Policy in Midland, Mich. Todd Nesbit, Ph.D., is a senior lecturer in economics at The Ohio State University and a member of the Mackinac Center’s Board of Scholars.

Will Michigan GOP Continue Michael Moore Film Subsidies?

Program is a waste of taxpayer money

Michael Moore received over $840,000 from Michigan taxpayers to make a film (image via David Shankbone at Wikicommons).

In 2011, left-wing filmmaker Michael Moore sat on the advisory council for the Michigan Film Office. The office is in charge of determining what productions will receive the hundreds of millions of dollars that have been sent from state taxpayers to mostly out-of-state moviemakers since 2008.

So perhaps it should not be surprising to learn that Moore himself – with a reported personal net worth of $50 million – was able to grab taxpayer money to cover some of the costs for his 2009 film “Capitalism: A Love Story” (which criticized the well-connected for taking taxpayer money).

As previously reported by Michigan Capitol Confidential: “Moore requested and was approved for $1 million from Michigan’s film subsidy program. In the end, according to The New York Times, he received over $840,000 from Michigan taxpayers to film some of the movie in his home state.”

Today, the Legislature is considering a bill that would end the film incentives fiasco once and for all. The program has redistributed nearly $500 million from taxpayers, added no jobs to Michigan’s film industry, has been criticized by independent scholars from across the political spectrum, and has contributed to schemes that resulted in the near-bankruptcy of the city of Allen Park and a raid of the state’s teacher pension fund to bailout a movie studio in Pontiac.

House Bill 4122 has passed out of a committee in the state House. It now heads to the full House where it is expected to pass – the House and Gov. Snyder have previously proposed ending the program. Then the bill will head to the state Senate, which has a 27-11 overwhelming Republican majority, where it may hit a roadblock. Insiders say there may be enough legislators in the GOP to kill or severely stamp down the bill.

According to the last report filed by the Michigan Film Office, the film incentive created zero permanent jobs in 2013. It is central planning at its worst, and there are far better ways to spend taxpayer money.

LaFaive in Los Angeles Times

Detroit’s foreclosure problem and what to do about it.

Director of Fiscal Policy Michael LaFaive is quoted in Los Angeles Times on the subject of foreclosure in Detroit. According to the article, 62,000 Detroit property owners are facing foreclosure due to falling behind on the city’s high property taxes.

There are other ways the city can increase revenue. Privatizing the city’s transportation system could alone save it millions. Detroit should also look to the city of Pontiac, which has made commendable progress in pulling itself out of bad financial straits. The city of Detroit has already said it plans to lower property taxes for homeowners in June, in hopes of alleviating the foreclosure problem.