Minnesota in 2020 had fifth highest cigarette smuggling rate

Minnesota is among the state's hardest hit by cigarette smuggling.

A new study released by The Tax Foundation this week reports high tax rates on cigarettes induce smuggling of tobacco products from low-tax states or foreign sources into high-tax states.

“States and municipalities have spent millions to combat cigarette smuggling. Recent policy responses include greater law enforcement activity on interstate roads, differential tax rates near low-tax jurisdictions, banning common carrier delivery of cigarettes, and cracking down on tribal reservations that sell tax-free cigarettes,” the “Cigarette Taxes and Cigarette Smuggling by State, 2020” report said. “However, the underlying problem persists. High cigarette taxes act similarly to a ‘price prohibition’ on the legal product in many U.S. states, incentivizing smuggling and illicit activity.”

Consumers searching for ways around penalties and restrictions might shop across borders, and some dealers might produce counterfeit cigarettes and tax stamps modeled off legitimate American brands and sell them illegally to consumers, without paying any tax or conforming to quality control standards, the report said.

Michigan free-market think tank The Mackinac Center for Public Policy, which has studied cigarette smuggling rates since 2008, reported in June that Minnesota’s 2020 rate, 34.76%, was the fifth highest among the 47 states included in the report.

The state tax of $3.65 per pack exceeded the taxes in all neighboring states in 2020. North Dakota’s state tax in 2020 was 44 cents per pack. Wisconsin, Minnesota’s neighbor that taxed the most, had a $2.52 per pack tax.

In 2020, with 73.6 million smuggled packs, Minnesota had the ninth highest number of the 47 states. It lost $268.5 million dollars in revenue that year, which was the fifth highest loss in the nation.

Mackinac Center for Public Policy excluded Hawaii and Alaska from its report because of the difficulty of modeling noncontiguous states. North Carolina was also excluded since it is the source state for the report’s “commercial smuggling” calculations.

According to the Tax Foundation’s report, Mackinac Center’s report identifies a strong connection between cigarette smuggling and tax rates across contiguous states and the District of Columbia.

New York had the highest inbound smuggling activity. More than half, 53.5%, of cigarettes consumed in New York in 2020 were smuggled. New York, California (44.8%), New Mexico (45.5%) and Washington (41.5%) exceeded Minnesota’s smuggling rate in 2020.

Since 2006, Minnesota’s tax rate on cigarettes has more than doubled, with a 146% increase. It raised its tax rate 2.2 cents from 2019 to 2020.

As of January 2022, Minnesota’s $3.04 state excise tax on cigarettes was 10th highest in the nation, Federation of Tax Administrators reported.

Minnesota also has an in-lieu cigarette sales tax that’s decided annually. Through Dec. 31, the rate is 66.3 cents. Beginning in January 2023, that rate increases to 69.2 cents per pack of 20 cigarettes, the Minnesota Department of Revenue said.

The District of Columbia, which has the highest excise tax on cigarettes, charges $4.50. As of January 2022, its additional in-lieu cigarette sales tax was 51 cents. New York and Connecticut tie, with a tax of $4.35. The U.S. median state excise tax is $1.78.

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