Minnesota poised to become hotbed for smuggled smokes
From the column: “In mid-2018, the city of Duluth clamped down on the sale of flavored products, such as menthol cigarettes, limiting their sale to adult-only smoke shops. The consultancy firm Management Science Associates reported in February 2019 that menthol volumes all but vanished in Duluth’s restricted stores but went up substantially in stores just outside Duluth. People didn’t so much stop smoking as just shop elsewhere.”
Minnesota has many natural wonders, but two laws proposed in St. Paul risk creating an unnatural wonder: making the state a hotbed for illegally smuggled cigarettes.
The first bill — House Bill 991 — would raise the cigarette excise tax by $1, from $3.04 per pack to $4.04. Consumers also pay an “in lieu” of sales tax cigarette tax that raises total taxes per pack an additional 63.3 cents. That is enough to increase the cigarette tax evasion and avoidance rate in Minnesota dramatically.
But that’s not all. The second bill — House Bill 904 — would ban the sale of flavored tobacco products, such as menthol cigarettes. High cigarette taxes and outright bans are an invitation to smuggling scofflaws to raise their game.
Much of our professional lives has involved research into cross-border economic activity, including cigarette smuggling. Part of that research involved building a statistical model to measure the impact of cigarette excise taxes on cigarette smuggling between states (mackinac.org/smokes#map>).
Minnesota’s smuggling rate was 36% in 2018. That means for every 100 cigarettes smoked in Minnesota, 36 were untaxed. If the state imposes an additional $1 hike, the rate would increase to nearly 45%, according to our model. That would give Minnesota the third-highest rate in the nation, behind New York and California.
We label all tax evasion and avoidance activities “smuggling” for simplicity. Minnesota law allows consumers to bring into the state a limited number of cigarettes purchased elsewhere, but with one out of every three cigarettes evading taxes, it’s clear that more smuggling is happening than the law allows. With its cigarettes taxed at just 44 cents per pack, North Dakota’s shops beckon Minnesota shoppers as the difference in tax rates means they can save big bucks.
But cross-border smuggling from North Dakota is only part of the story. Long-haul and large shipments of cigarettes and other tobacco products also make their way to Minnesota through organized criminals. A 2019 article on smuggling in the Pioneer Press pointed to Indiana as a likely source state. The cigarette tax rate there is a mere $1 per pack.
As much as higher excise taxes on cigarettes will entice more smuggling, the profit potentials for organized criminals will be even higher for banned flavored products. About 30% of all cigarette sales are menthols. Prohibiting them doesn’t mean that people will immediately stop smoking them; it’s more likely they’ll simply change where they buy them.
We have seen the prohibition experiment run in Duluth, Massachusetts, and Canada, and early evidence is that smokers reacted to bans by finding ways to continue purchasing these products, to the delight of smugglers.
In mid-2018, the city of Duluth clamped down on the sale of flavored products, such as menthol cigarettes, limiting their sale to adult-only smoke shops. The consultancy firm Management Science Associates reported in February 2019 that menthol volumes all but vanished in Duluth’s restricted stores but went up substantially in stores just outside Duluth. People didn’t so much stop smoking as just shop elsewhere.
Last year, Massachusetts was the first state to ban menthol cigarettes statewide and early indications are that the sale of menthol cigarettes in the neighboring states of New Hampshire and Rhode Island, increased by 90% and 29%, respectively. Those increases probably aren’t a coincidence.
A study of similar Canadian bans, titled “Intended and Unintended Effects of Banning Menthol Cigarettes,” found a drop in menthol use but also a significant substitution effect to other products. The authors write: “Provincial menthol bans significantly increased non-menthol cigarette smoking among youths, resulting in no overall net change in youth smoking rates. We also document evidence of evasion: provincial menthol bans shifted smokers’ cigarette purchases away from grocery stores and gas stations to First Nations reserves,” where bans are not in effect.
We don’t smoke ourselves. We don’t want readers to do so, either. But cigarette taxes are already so high that those still smoking have a great preference for doing so. Raising excise taxes again or banning a popular product will do relatively little to get the remaining smokers to quit but it will have a large effect on smuggling rates.
Michael LaFaive is senior director of fiscal policy for the Mackinac Center for Public Policy (mackinac.org/), a research and educational institute based in Midland, Michigan. Todd Nesbit is an assistant professor of economics at Ball State University in Muncie, Indiana. Both are contributors to the Mercatus Center book, “For Your Own Good: Taxes, Paternalism and Fiscal Discrimination in the 21st Century.”