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Economists predicted that Minnesota businesses would get hurt if a) the DFL legislature passed the massive cigarette tax increase and b) Gov. Dayton signed that tax increase into law. This article is the first report I’ve read that verifies these economists’ predictions:

If you’re a smoker living in Minnesota near the North Dakota border, you’ve undoubtedly discovered that you can save a lot by driving a little. Since Minnesota’s cigarette tax jumped by around $1.50 a pack on July 1st, tobacco wholesalers have noticed a dramatic drop in sales.

Convenience store operators told legislators that their cigarette tax increase would hurt their business. KFGO’s report verifies that prediction. This information amplifies that prediction:

“Petro Serve USA” CEO Kent Satrang says the shift to North Dakota was almost immediate. Satrang says the convenience store industry lobbied the legislature for a smaller tax increase.

If the fiscal note said that increasing the cigarette tax would increase the revenues from the cigarette tax, then the fiscal note wasn’t honest with legislators. I wrote here about the disastrous effects raising the cigarette tax had on other states:

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.

When cigarette tax rates are increased, the revenues to the state shrinks because buying habits dramatically change. It’s virtually guaranteed that cigarette tax increases create underground economies. Either that or smokers will order their cigarettes through the internet. Smokers living near a state border will drive across the border and stock up.

The point is that people change their buying habits when taxes cause prices to spike. There’s no question that cigarette tax hikes cause cigarette price spikes. That tax increase causes an immediate price spike because there’s no other way for the retailer to make a profit. It’s a raise-prices-or-lose-money proposition.

Declining convenience store sales isn’t the only negative about the cigarette tax increase:

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.

Tax avoidance is another problem, as is cigarette smuggling. Prior to the cigarette tax increase of July 1, it’s estimated that 19% of cigarettes smoked in Minnesota were smuggled into Minnesota. It’s estimated that 30% of all cigarettes smoked in Minnesota will be smuggled into Minnesota.

This is terrible tax policy. There isn’t a single benefit gained from raising the tax rate. Fewer revenues will come into the state general fund. Convenience stores are already getting hurt. The increased cigarette prices won’t reduce teen smoking rates.

This is just another example of how the DFL’s tax policies don’t accomplish what the DFL promises they’ll accomplish.

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One Response to “Cigarette tax hike hurting Minnesota businesses”

  • walter hanson says:

    Gary:

    Lets not forget while this shows what people will do to save money that smoke since there are far more nonsmokers that pay income tax that people will try to avoid paying income tax. And that can happen anywhere in the state.

    Some rich people might even move out of the state to one that has cheaper income tax rates.

    Walter Hanson
    Minneapolis, MN

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