By Tom Steward | Watchdog Minnesota
A deal in the Legislature jacks up taxes at least $2 billion while ushering in a tax-and-spend, tax-and-smoke era that increases Minnesota’s dependence on cigarette and tobacco taxes and fees and top earners.
Gov. Mark Dayton and House and Senate Democratic-Famer-Labor leadership announced the plan this past weekend.
“There’s going to be an additional per pack tax on cigarettes that will be part of the deal,” Senate Majority Leader Tom Baak, DFL-Cook, said in a Capitol news conference Sunday.
The legislative session ends May 20, and details still need to be worked out on the $38 billion-plus budget package. Still, Minnesota could move up on the list of heaviest taxed states by instituting a new top-tier income tax bracket on the highest 2 percent of earners to raise $1.1 billion or more while doubling down on cigarette and tobacco taxes. Minnesota’s tax burden ranks seventh highest among states, according to the Tax Foundation.
“We’re going to be investing in priorities that Minnesotans clearly share — balancing our budget without gimmicks, pay back the IOUs we owe to our schools this biennium,” said House Speaker Paul Thissen, DFL-Minneapolis. “We’re going to make historic investments in education. Those are the things that are going to set our state on a course of future prosperity and broad expansion of our middle class.”
Minnesota expects to raise $423 million from cigarette and tobacco taxes and fees in fiscal 2013. Collections from those taxes and fees peaked at $453 million in 2006, after Gov. Tim Pawlenty’s 75-cent per pack increase, which was widely criticized for being packaged as a “health impact fee” rather than a tax increase. The smoker’s tax would enrich state coffers an additional $333 million to $434 million per biennium, depending on negotiations.
For Dayton, it means reversing his forceful opposition to raising cigarette taxes while campaigning for the state’s top office.
“That’s money out of the pockets of working people and poorer people,” said Dayton in 2010. ”And that means kids don’t have as much to eat or don’t have the same quality of food. Those are addictions, and I think you treat addictions as addictions and you don’t penalize the people who are dealing with them economically.”
The current cigarette tax of $1.23 will increase by anywhere from 94 cents to $1.60 per pack under the House provision, now being negotiated in conference committee. Dayton acknowledged the regressive tax would affect many poorer Minnesotans.
“We’re not raising taxes on the middle class with the exception of the cigarette tax,” Dayton said at the Sunday news conference.
Any increase would position Minnesota closer to Wisconsin’s $2.52 per pack cigarette tax, but nevertheless leaves an opening for other border states with lower tobacco taxes, according to some legislators. Iowa levies a per pack tax of $1.36, South Dakota charges $1.53 and North Dakota — among the lowest in the nation — taxes cigarettes at 44 cents per pack.
“I might as well put a sign up in my district that says, ‘Don’t bother coming here, just go over to North Dakota,’” said Rep. Deb Kiel, R-Crookston. “Because that’s what we’re doing. We’re sending our business, we’re sending our people to places that do not tax this way.”
Supporters of the higher cigarette tax insist it’s about getting more Minnesotans to stop smoking through higher prices, and it’s not about raising more money for pet projects.
Rep. Ann Lenczewski, DFL-Bloomington, chairs the House Taxes Committee. She suggested on statewide radio last week the cigarette tax could be quadrupled, yet it would still fail to cover health-care costs related to tobacco use.
“You could raise the tax on cigarettes somewhere between seven and 10 dollars a pack and not cover the total cost that the rest of Minnesotans pay who are choosing not to make that discretionary purchase with tobacco,” Lenczewski told Minnesota Public Radio. “Now in the House we set the number much lower than that, $1.60 as pack, because we recognize that when you get past a certain amount … you’re hitting people who just can’t quit.”
“The tax code is designed to help fund government in as fair a way, across the board, as possible,” responded Sen. Julianne Ortman, R-Chanhassen. “Not to punish certain types of behavior or certain types of people. And we know that the cigarette tax is a very regressive tax. It impacts the poor and the elderly first.”
Minnesota State Health Commissioner Edward Ehlinger estimates increasing the cost of cigarettes by 10 percent would prevent nearly 26,000 young smokers and cut adult rates by 2 percent. At the same time, studies show increasing the cigarette tax to as much as $2.83 under the House proposal would lead to an increase in cigarette smuggling, at the expense of the state treasury.
“Cigarette tax differentials across state lines have been shown to create lucrative business opportunities for smugglers who transport cigarettes from high-tax states to low-tax states, potentially inviting crime into Minnesota’s borders,” according to the Tax Foundation.
A 2009 Minnesota Department of Revenue study estimated the amount of tax revenue lost to smuggling at $20 million to $31 million or more.
“Regardless of any change in legislation affecting the taxes on tobacco products, the Minnesota Department of Revenue will continue to use the enforcement methods available to investigate and prevent the smuggling of illegal tobacco products into the state,” a spokesman told Watchdog Minnesota.
State and federal authorities last week arrested several people on charges of cigarette smuggling in Rhode Island, a state with the second highest tobacco tax in the U.S. Meantime, New York City, in the state with the highest cigarette tax, plans to double its enforcement staff and seek legislative authority to increase the criminal penalties to snuff out rampant smuggling to avoid the stiff state tax.
Contact Tom Steward at email@example.com.