Cigarette Tax Hikes Cause Unintended Consequences

Editor’s note: This article originally appeared in Duluth News Tribune on April 15, 2015.

Minnesota raised its excise tax by 130 percent in 2013, the consequences of which may not be fully understood. The large increase in price from that tax hike has created a yawning gap between the cost of cigarettes in Minnesota and elsewhere, spurring rampant smuggling, according to research conducted by my colleague Todd Nesbit and me.

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We built a statistical model to measure the degree to which cigarettes are smuggled in 47 of the 48 contiguous states. We estimate that the 2013 excise tax hike on cigarettes helped lift Minnesota’s cigarette smuggling rate to more than 33 percent of the total market.

The good news is that lawmakers have recognized that an increase in smuggling is a real issue. The bad news is that their attempts to thwart it — including hiring more auditors — will not be very effective. The reason is simple. The profits (or savings) from tax evasion and avoidance are too great. Consumers and large-scale smugglers will find ways to avoid the higher taxes.

We expect legal paid sales of cigarettes to decline as a result of the last and forthcoming tax increases; however, the majority of the drop will not be a function of quitting smoking. This is important to recognize because health advocates and too many politicians point to these drops as evidence that their sin taxes have “worked.” That is only true to a small degree. A 2004 paper by economist Mark Stehr and published in the Journal of Health Economics found that up to 85 percent of the change in cigarette sales may be from tax avoidance and evasion and not from “kicking the habit.”

Taxpayers, be they smokers or otherwise, are not sheep queuing up to be sheared. Many will work to evade taxation. Even then, many people may think they are buying a legal product when they have in fact been smuggled. No amount of new bean counters or police officers will stop this trade.

In 2010, a corrections officer in Minnesota was sentenced to prison for taking $6,500 from a prisoner in exchange for smuggling cigarettes and other contraband items into the prison at which he worked, according to Minnesota Public Radio.

Even if Minnesota becomes a veritable police state, smuggled cigarettes still can get through its porous borders and into the hands of smokers.

A better solution to Minnesota’s smuggling problem is to either cut the current excise tax rate or not raise it any further, allowing the real price of smokes to drop back to more reasonable levels.