Gov. Dayton didn’t tell Minnesotans the truth when he said “These are just common-sense changes that are going to benefit the vast majority of people” in talking about his tax proposals. They don’t bear any resemblance to reality.

For instance, Gov. Dayton’s plan to raise cigarette taxes by 94 cents a pack won’t generate the revenues he’s predicting. In fact, it’s likely to be a big bonus to Indian reservations and towns bordering Minnesota.

Why does Gov. Dayton think that a smmoker living in Chanhassen wouldn’t drive to Mystic Lake and buy their cigarettes?

There’s even imperical evidence that this doesn’t work:

In 2009, Washington, D.C. raised its cigarette tax from $2.00 to $2.50 per pack. The District projected the new tax would generate $45 million in revenue, about 20 percent above 2009 levels. Instead, revenues came in $12 million below projections and $4.2 million lower than before the tax was imposed. Similarly, New Jersey reported a $52 million shortfall in tobacco tax revenues after it raised its cigarette tax by 17.5 cents in 2007. Due to these declining revenues, states often turn to broad-based tax increases to pay for an overspending problem. A recent NTU study also showed that 41 of 59 state tobacco tax increases from 2001-2006 were followed by more expansive tax increases within two years, as states attempted to make up for tobacco revenue that never appeared.

Based on these statistics, it’s pretty apparent that cigarette tax increases fail, which leads to higher tax rates later to make up for the increased spending that the cigarette taxes were proposed to pay for. That isn’t the only proof that cigarette tax increases don’t work. Here’s more proof:

A 2009 study commissioned by the Minnesota Department of Revenue pointed out significant evidence of tobacco tax evasion after the state’s last cigarette tax increases in 2005 and 2006. Should Gov. Mark Dayton’s proposed 94 cent per pack cigarette tax increase succeed, it is likely that the state will see a large revenue shortfall due to smokers shifting their consumption across state lines, to the Internet, or to illicit black market tobacco.

It’s totally predictable that changes in taxation rates changes behavior. Though Gov. Dayton and Speaker Thissen won’t willingly admit it, that’s a verifiable fact. That Minnesota Department of Revenue study is proof of that.

What’s worst about Gov. Dayton’s proposal is that he’s a hypocrite:

Mark Dayton: Well, I’d say most of what we’ve talked about today in terms of you know much of what we’ve talked about today in terms of DNR, in terms of what we’ve just talked about of preventing the invasion of invasive species, and what we talked about in terms of resource management, public acquisition and the like, involves a commitment of public resources. And I’ve talked about specifically how to raise those revenues, Mr. Horner, by making the richest Minnesotans, people individuals with income over $150,000, and joint filers with income of almost $175,000 pay a little more in taxes, and millionaires paying more in taxes which you said last night on Almanac you’re opposed, millionaires paying more in taxes in this state. And you’re instead in favor of you know extending the sales tax to clothing, extremely regressive. And also in response to Almanac, you’re in favor of raising taxes on alcohol and cigarettes, another regressive tax. So the difference between us is I want to raise taxes on the rich, and you want to raise taxes on sportsmen and women and and middle income working families.

That’s interesting. In 2010, Gov. Dayton criticized Tom Horner for supporting the same regressive tax that he’s proposing in his budget.

In addition to not being particularly astute on tax policy, Gov. Dayton apparently isn’t particularly honest about his taxation policies, either.

Gov. Dayton needs to put aside his counterproductive tax policies and focus on things that actually work.
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9 Responses to “Cigarette taxes, revenue shortfalls and big tax increases”

  • Nick says:

    The state of NY has an astonishing $4.35 tax on a pack of cigarettes while Missouri has a mere $0.17 tax on pack of cigarettes. Price of a pack of cigarettes in NYC is an outrageous $11.00 per pack. There is a huge black market in NY since the price of cigarettes are really high.

    Remember that the infamous Health Impact Fee that Pawlenty signed into law was supposed to raise an extra $178 million in tax revenue, yet it fell way short of projections, raising only a paltry $4 million more in tax revenue. So why does Dayton want to do the same especially when the extra revenues from the tax increase fall way short of projections?

  • Gary Gross says:

    Nick, You’re looking at this through the wrong lens. It isn’t about raising revenues. It isn’t about economic principles. It’s about being wedded to a failed ideology.

    The ACA will fail fairly quickly. That didn’t matter to Obama, Reid & Pelosi because progressives had practically been peeing in their pants for a century to pass universal health care. They wanted that that badly because they craved the control over people’s lives through the most fundamental things.

    It’s all about the control.

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