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The new tobacco tax signed into law last week will raise the price of cigarettes in Minnesota by $1.60 a pack, add more than $430 million to state coffers over the next two years and, public health advocates hope, prevent nearly 48,000 young people from taking up the habit.
Then there will be the unintended consequences.
Committed smokers might beat a path to North Dakota, where a pack of cigarettes will cost nearly $3 less. Or they might try to offset the increase by rolling their own cigarettes, or by switching to electronic cigarettes. Worse yet, they might turn to the black market, which is already a concern in Minnesota for some tobacco products.
“This increase will definitely provide an opportunity for criminal organizations,” said Mike Feinberg, special agent in charge of the Homeland Security Investigations office that covers Minnesota, Nebraska, Iowa, North Dakota and South Dakota.
The 130 percent cigarette tax increase, which takes effect July 1, will drive Minnesota from 29th place nationally to sixth. Legislators who supported it said they had their eyes on both the potential health benefits and the amount of revenue it would spin off to help pay for the new Vikings stadium in downtown Minneapolis.
State and national anti-smoking groups cite research indicating that tobacco price increases could prompt more than 36,000 adult smokers to quit, save 25,700 Minnesotans from smoking-related deaths and more than $1.65 billion in future health costs.
“We are thrilled about the legislation,” said Molly Moilanen, public affairs director for Clearway Minnesota and co-chair of the Raise It for Health Coalition, a large group of public health advocates who lobbied for the tax hike.
Smokers who say they’ve tried and failed to quit take a different view.
“It sucks,” said John Leonard, 53, of St. Paul, a pack-a-day smoker.
His wife Angela, 49, says she’d understand if the money went to health care, but denounced the idea of spending it on stadiums or general state expenses. She says she smokes two packs a day, so she and her husband already try to cut costs by buying cheaper pipe tobacco and rolling it into cigarettes. Habitual smokers will find ways to offset the higher taxes, she said.
That’s what worries law enforcement agencies. The money that can be made smuggling cigarettes from low-tax states to high-tax states has led some gangs to switch from illegal drug sales to bootlegging tobacco.
Minnesota has prosecuted some tobacco “diversion” cases already. Hamza Ahmad Abualzain, 33, of Shoreview, pleaded guilty in January to evading taxes after he was caught with a vanload of untaxed, unstamped tobacco products worth more than $30,000 at wholesale. He was sentenced in March to four days in jail and three years of probation. Adel Yacoub Atshan, 59, of Milwaukee, was convicted two years earlier of evading sales taxes after he was caught selling untaxed tobacco products to the owner of an Eagan gas station.
Federal authorities in Minnesota are working on three large tobacco diversion cases now, according to law enforcement sources. Those cases, like others in recent years, involve what’s known as “other tobacco products,” such as small cigars, snuff and chew, a relatively small part of the tobacco market.
Minnesota hasn’t had much of a cigarette smuggling problem in recent years because its taxes are lower than those in all the surrounding states except North Dakota. But when the new tax rate takes effect, Minnesota tobacco excise taxes will lead the region, and law enforcement agencies say they expect cigarette smuggling to pick up.
Terrorists and tobacco
Along the coasts, organized crime groups, including some with ties to terrorist organizations, have begun selling counterfeit cigarettes from foreign countries and smuggling legally purchased cigarettes from low-tax to high-tax states. In New York City, 16 Palestinian men were indicted this month in what authorities describe as a smuggling operation that cost the state more than $80 million in sales tax revenue. Some of the men allegedly had ties to convicted terrorists. Earlier smuggling operations along the East Coast were found to have funded Hamas or Hezbollah.
Last July, state and federal investigators in Los Angeles uncovered $1.8 million in counterfeit cigarettes imported from China along with large quantities of counterfeit cigarette tax stamps for five states — including Minnesota.
The North Dakota magnet
Whether Minnesota smokers will cross the border is unclear.
Frank Chaloupka, an economics professor at the University of Illinois in Chicago and an associate with the National Bureau of Economic Research, said cross-border sales occur when price differences between neighboring states get too wide. But the volume of such sales depends on the location of population centers, he said. The Twin Cities is closest to Wisconsin, where the average price of a pack of cigarettes is $7.24. The average in Minnesota is $5.81, so after the $1.60 tax hike, it will be just 17 cents higher.
“That’s not enough to make it worth crossing the border,” Chaloupka said. “You do see people try to avoid the tax when the tax goes up, but usually it’s relatively small in number and once they realize the costs involved, the gas and everything else, most of them go back to their original purchasing behaviors and tax avoidance falls off pretty quick.”
Chaloupka worked with the Campaign for Tobacco Free Kids to model estimates on the effects of tobacco tax hikes. He said the model accounts for expected tax avoidance.
Still, the expected $3 gap between a pack of cigarettes in North Dakota and in Minnesota has vendors in places like Moorhead worried.
“You can bet our sales will go down if they tax the tobacco that high,” said Cindy Becker, who manages a Stop N Go convenience store in Moorhead. She said customers already complain that they should just do their cigarette shopping in Fargo.
The notion that tax increases really reduce adult smoking is now in doubt, according to two economists from the University of Illinois in Chicago who will soon publish an article in the journal Economic Inquiry.
“Our analysis … suggests that adult smoking is largely unaffected by taxes,” wrote Kevin Callison and Robert Kaestner in a paper for the National Bureau of Economic Research. They theorize that median tobacco taxes at this point may be so high that further increases will have little effect on adults who still smoke.
“At best, a 100 percent increase in state tobacco taxes such as that proposed by Minnesota is likely to have a relatively minor effect — at most a 5 percent reduction in smoking, but a good chance of having an even smaller effect,” Kaestner said in an e-mail.
Paul Wilson, director of tax research for the Minnesota Department of Revenue, said that when the state tacked on a 75 cent “health impact fee” to the cost of cigarettes in 2005 the agency’s modeling correctly predicted the impact on sales and tax revenues. If Callison and Kaestner are correct, then it just means more revenue for the state, he said.
“We feel reasonably confident with the estimate,” he said. “Smuggling is the obvious wild card.”