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Thriving black market means no tax on smokes

By   /   January 17, 2013  /   2 Comments

By Tom Steward | Minnesota Watchdog

Next time you see a group of co-workers head out for a smoke break, take a deep breath:  One in five Minnesota smokers on average lights up a bootlegged cigarette, sending millions of dollars of lost state tax revenue from the $1.23 per pack tobacco tax up in smoke, as well.

UP IN SMOKE: Smuggled cigarettes cost states millions in lost tax revenue. (AP photo)

An estimated 20 percent of cigarettes marketed in Minnesota are smuggled in from other states, placing Minnesota 16th on the list of states with the biggest bootlegging problem in a newly released national study.

New York, the state with the highest tobacco tax at $4.35 per pack, also faces the biggest bootlegging problem  with 61 percent of cigarettes smuggled into the state. New Hampshire, a state with a lower tobacco tax than surrounding states even at $1.60 per pack, exports an estimated 27 percent of its cigarettes to higher taxed neighbors, the most of any state.

“Public policies often have unintended consequences that outweigh their benefits.  One consequence of high state cigarette tax rates has been increased smuggling, as criminals procure discounted packs from low-tax states to sell in high-tax states,” the Mackinac Center for Public Policy-Tax Foundation report  states.

A 2009 Minnesota Department of Revenue study estimated the illegal trade in cigarettes cost the state treasury $20 million to $31.5 million or more.

“Minnesota continues a long history of rigorous administration and enforcement of cigarette and tobacco tax laws.  We always respond to information which may lead to the discovery of untaxed tobacco or cigarettes,” the Minnesota Department of Revenue said in a statement.

Projections of lost tax revenue vary widely and change over time with the fluctuation in tobacco tax rates in neighboring states.

In recent years, for example, Wisconsin has more than doubled its tobacco tax to $2.52 per pack, paving the way for a tripling of bootlegged cigarettes entering the state, according to the study. Minnesota’s cigarette tax, meanwhile, remained steady while the state’s estimated sales of black market cigarettes declined from 24 to 20 percent.

“It’s gone on for years. It’s a long running problem and is only likely to get worse,” said Patrick Fleenor, an  economist, author and expert on the issue. “The taxes are higher than they’ve ever been on tobacco,  and in a down economy it’s an easy way of making money. It’s hard to get caught and the penalties are low compared to other crimes.”

In a recent Star Tribune op-ed, Fleenor argued against a significant cigarette tax hike proposed by two GOP state legislators in 2012. It would provide more incentive for smugglers to target Minnesota, he said. With the proposed tax of $2.52 per pack, Fleenor wrote that bootleggers could earn $1 million on every truckload of cigarettes smuggled across the border.

The state’s problems date back to the 1950s, when cigarette sales and tax revenue plunged following the passage of Minnesota’s tobacco tax as smokers turned to other outlets.  To date, no bill has been introduced to raise the cigarette tax in the 2013 Minnesota Legislature.

“There’s a lot of casual bootlegging, a guy or two running cigarettes from a low tax state and renting a U-Haul,” Fleenor said in an interview. “But retailers and wholesalers can do it as well. They can sell much larger quantities and people don’t know what they’re buying and mix them in.  It’s called camouflaging.”

Some critics take issue with the claim that lowering cigarette taxes will significantly reduce cigarette smuggling.  The Tobacco Control Legal Consortium, a St. Paul-based group that supports high tobacco taxes, said exploding tax-free sales over the Internet, international smuggling rings and a lack of enforcement also contribute to the annual loss of billions of dollars in unpaid state tobacco taxes.

In a 2006 survey of cigarette smuggling, Minnesota ranked 10th among the states.  Since then, Wisconsin, South Dakota and Iowa have raised their cigarette taxes by 189 percent to 278 percent, while Minnesota did not. The new survey shows all of those border states now have a bigger cigarette smuggling problem than Minnesota, with the exception of North Dakota.

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Tom Steward

  • ICYNDICEY

    These states can go fu** themselves with their “taxes”! When are we going to have another Tea Party in this country and lay these treasonous bastards out?

  • Jazzee

    OH I love black market cigs can they come to Nebraska??? they just raised taxes on cigs to build a cancer center for a hospital here…apparently the hospital can’t raise their own money so the smokers get nailed again..they called it an ‘occupation tax’ seriously????? wow they lie all the time to the public….love the black market idea