In recent years, as Minnesota lawmakers have steadily raised the tax on tobacco products, a cigarette smuggling movement has emerged to avoid the high prices.
More than one in three cigarettes smoked in Minnesota in 2014 were trafficked into the state from other lower-taxed environs, the Tax Foundation said in its report published Tuesday.
When the Washington D.C.-based think tank began its cigarette smuggling study in 2006, just over 23 percent of cigarettes consumed in Minnesota were brought in from across state lines. Eight years later and that rate has increased to 35.5 percent.
During that eight-year period, Minnesota’s tax on cigarettes has more than doubled. (In 2014, the state's tax on each pack was $3.34.) Legislation passed in 2013 included steep per-pack increases and an annual inflation-adjustment formula that will continue to drive prices up.
“High cigarette tax rates can result in a variety of different tax avoidance scenarios,” said Scott Drenkard, one of the co-authors on the Tax Foundation’s report. “A smoker traveling to another state with lower taxes (and cigarette prices) might stock up before heading back home. In other instances, the smuggling is larger scale and could involve an organized network that moves large quantities of cigarettes from low-tax states such as Virginia to high-tax states like New York. There have also been reported incidents of counterfeit tax stamps.”
In all, Minnesota has the fifth-highest cigarette-smuggling rate in the country.
Taking the top spot was New York with both the highest 2014 tax rate ($4.35 per pack) and smuggled cigarette consumption rate (55.4 percent). The only other states with a higher smuggled cigarette consumption rate than Minnesota were Arizona (49.6 percent), New Mexico (46.2 percent) and Washington (45.2 percent).
“Policymakers that want to curb cigarette smuggling have to think about more than just enforcement,” Drenkard said. “If a state enacts an excessively high tax rate on a product, consumers will naturally look to other jurisdictions for lower-cost options.”
Among Minnesota’s neighboring states, North Dakota had the lowest 2014 tax on cigarettes (44 cents per pack). Iowa was the next closest ($1.36 per pack), followed by South Dakota ($1.56 per pack) and then Wisconsin ($2.52 per pack).
“It’s important for policy makers to consider the tax rates in surrounding states,” Drenkard added. “Being too far out of line with neighboring jurisdictions could increase the likelihood of smuggling.”