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I referenced this study in my post about Gov. Dayton’s proposed cigarette tax increase because it illustrates how counterproductive Gov. Dayton’s proposed cigarette tax increase is:

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.

That’s just the tip of the iceberg. These bullet points should get your attention immediately:

  • After an effective 31.25 cent per pack increase from 2004 to 2005, the state’s foregone revenue increased 66 percent, from $9.3 million to $15.5 million.
  • After an effective 46.75 cent per pack increase from 2005 to 2006, the state’s foregone revenue increased 103 percent, from $15.5 million to $31.5 million.
  • The $31.5 million in revenue lost due to tax evasion in 2006 represented nearly 8 percent of Minnesota’s total cigarette tax revenue.
  • Gov. Dayton’s proposed tax increase would be more than double the 2006 tax increase.
  • The propensity to evade the cigarette tax was highest in areas bordering North Dakota, which currently has a significantly lower cigarette tax rate than Minnesota. Should Gov. Dayton’s plan pass, South Dakota and Iowa will also have a lower rate than Minnesota.

Notice that increasing the cigarette tax doesn’t trigger more people to quit smoking. It triggers them to avoid places that charge the higher tax rate. People living in Hastings, MN will simply drive across the river to Hudson, WI. People living in Duluth, MN, will drive to Superior, WI. People living in Jordan will drive to Mystic Lake to buy their cigarettes tax free.

The inescapable truth is that a proposed cigarette tax increase will hurt retailers like SuperAmerica and Holiday gas stations. It’ll hurt licquor stores, too. It’ll help Wisconsin retailers. It’ll help the casinos, too.

Is that really the path Gov. Dayton wants to take Minnesota? Let’s hope it isn’t but let’s admit that it’s impossible to predict what’s going on inside Gov. Dayton’s brain.

This is important information, too:

Tobacco tax revenue is already declining; it will drop even more precipitously when consumers are given the incentive to buy outside the state. The Mackinac Institute has already noted that nearly 20 percent of cigarettes smoked in Minnesota are purchased elsewhere.

It appears as though the DFL budget is getting built on the premise that the cigarette tax will increase general fund revenues. The DFL is basing their spending on revenue that likely won’t happen. What will the DFL do when (not if) the additional revenues aren’t realized?

It’s time for Gov. Dayton to stop hurting Minnesota retailers. It’s time for him and the DFL to stop budgeting based on wishful thinking, not solid priorities.

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5 Responses to “How Gov. Dayton’s cigarette tax undermines retailers”

  • walter hanson says:

    Gary:

    Your post ignores the fact that Dayton and the Democrats don’t see evidence like this. They think if they raise taxes 94 cents they will get lots of revenue, cause people to stop smoking, and harm no one economically.

    Walter Hanson
    Minneapolis, MN

  • Gary Gross says:

    Walter, regarding the taxes: they aren’t that stupid. They’re that driven by their failed ideology.

  • Matt says:

    Mystic Lake amazingly charges MORE than Mpls area convenience stores for Tobacco.

    A pack of camels that cost you $5.25 on average pre-tax hike was $6 at Mystic. Now that $7 pack of Camels costs $8.50 at Mystic. They’re completely shameless in their price gouging. Do NOT go to the Native Americans expecting to save money.

  • Gary Gross says:

    If that’s true, then they’re the outlier. Grand Casino doesn’t charge a cigarette tax.

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