Last week, I wrote this article to criticize the tactics that Gov. Dayton is employing to sell his cigarette tax increase. In the article, I highlighted the fact that Gov. Dayton was using the tragic death of a young lady’s father to sell his cigarette tax increase.
This week, Big Government highlights the disparity in taxation rates between Minnesota and North Dakota. It’s a pretty stunning difference:
According to one expert testifying at a House Taxes Committee hearing last week, one reason revenue targets might not be met is that while post-tax hike, Minnesota’s cigarette tax would sit at $2.17 per pack, neighboring North Dakota taxes a pack at a mere 44 cents. That means that a bootlegger smuggling cigarettes from North Dakota to Minnesota for illicit sale there could evade $700 in taxes on a U-Haul truck sized shipment.
Retailing associations are fighting Gov. Dayton’s proposed cigarette tax increase. Bootleggers are praying for Gov. Dayton’s proposed cigarette tax increase because it means big profits for them.
It isn’t that retailers like SA or Holiday make tons of money if a person only buys a pack or a carton of cigarettes. It’s that these retailers would be denied essential traffic if people changed their buying habits. When people start buying cigarettes through a bootlegger, they don’t visit the SA or Holiday store and buy gum, pop, snacks and other high profit items. This op-ed offers a great history-based illustration of what happens when politicians raised the cigarette tax:
By the mid-1950s, official figures show, the sale of legal, tax-paid cigarettes had plunged 20 percent below the national level. Frustrated by the inability to collect the taxes due, the state’s chief cigarette tax administrator quipped that “even the attorneys who come into my office are smoking untaxed cigarettes.”
The state government’s response was to increase enforcement and try to discourage consumers from buying tax-free cigarettes, but nothing worked. In spite of this, lawmakers repeatedly hiked the tax, and by the mid-1970s, Minnesota had one of the highest cigarette excises in the country. Soon illegal cigarettes from as far away as Kentucky and North Carolina were pouring into the state.
That’s only part of the story. Here’s another part to the story:
The latest series of hikes, which began in 2005, have pushed the per pack tax to $1.58. A 2009 report commissioned by the Department of Revenue found that the state government loses millions of dollars annually to cigarette tax evasion. These losses do not include those incurred by the private sector, such as those resulting from lost sales and increased thefts.
These statistics should illustrate the foolishness of raising the cigarette tax:
- 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.
Putting it as simply, the only winners when states raise cigarette taxes are the criminals. That alone should frighten legislators into tabling Gov. Dayton’s proposed cigarette tax increase.
Minnesota’s retailers would certainly cheer that decision.