Minnesota has one of the state’s highest cigarette taxes, at $3.77 per pack this year. Between 2006 and 2017, the state’s cigarette tax increased by almost 150 percent.
As of 2017, when the tax was about $3.59 per pack, Minnesota was 6th overall for the state with the highest sales tax. According to the 2017 data, New York comes in “first” for having the highest tax per pack, while California comes in second.
Because of these high taxes, a huge chunk of Minnesota’s cigarettes are smuggled into the state. According to estimates by the Tax Foundation, back in 2006, about 20% of Minnesota cigarettes were smuggled in. As of 2017, the percentage of smuggled cigarettes consumed by the state was over 34% (the Tax Foundation has yet to examine data after 2017).
Cigarette smuggling can be lucrative. As long as the smuggler isn’t caught, which very rarely happens, a nice arbitrage can be made between the price of cigarettes in low tax states and the price of cigarettes in high tax states like Minnesota.
For example, North Dakota attaches a tax of only $0.44 to a pack of cigarettes. Say a pack of cigarettes costs $6.00 wholesale, which means that at the point of sale the pack costs $6.44. That same pack costs $9.77 in Minnesota, once the state’s sales tax is added in.
Assuming no other costs, if the smuggler buys 100 packs of cigarettes in North Dakota and is able to sell them at the regular price in Minnesota, the smuggler just made $333.00. Assuming no other costs is a stretch, but start thinking in the tens of thousands of packs and there’s a huge profit to be had (e.g., 10,000*3.33=$33,300).
Aside from probably costing the state taxpayers revenue, there is another concern. Cigarette smuggling may be empowering criminal organizations that take part in a whole host of more-sinister crimes, including the smuggling of hard drugs and human trafficking.
Historically, however, there has been bipartisan support for Minnesota’s cigarette tax increases. Both Republican and Democrat Minnesota Governors, such as Tim Pawlenty, Mark Dayton, and Tim Walz, have sought to raise cigarette taxes to plug budget holes or fund spending plans. And today, there is no serious effort in St. Paul—even among Republicans—to reduce the tax.
Willis Krumholz
Willis L. Krumholz is a fellow at Defense Priorities. He holds a JD and MBA degree from the University of St. Thomas, and works in the financial services industry. The views expressed are those of the author only. You can follow Willis on Twitter @WillKrumholz.
