A Tobacco Tax Hike More Likely To Inspire Smuggling Than Quitting

cigarettes tobacco

Grand Forks Rep. Eliot Glassheim has introduced a bill, HB1387, which would represent a massive 127% tax hike on cigarette sales. The excise tax would go from $0.44/pack to $1.00/pack.

Glassheim says that he expects the tax hike to raise $59 million in new revenue for the state, but that his goal isn’t so much revenue as getting people to quit smoking. “I hate to see people many of whom are addicted, suffer needlessly, have years cut off their lives, have families broken by heart disease, cancer and early death,” he’s told the media.

The problem is that his tax might not actually reduce smoking, or even raise that much revenue. Estimates from the North Dakota Policy Council and the Mackinac Center find that the tax hike is more likely to raise tobacco smuggling than anything else:

Cigarette smuggling has become rampant in parts of the country in large part due to tax-driven cost differentials between states. The Mackinac Center for Public Policy, a think tank out of Midland, Mich., has estimated cigarette smuggling rates for 47 of the 48 contiguous states. In some parts of the United States smuggling is rampant. New York’s estimated smuggling rate exceeds 60 percent of the total market.

According to the Mackinac Center’s recent report, in 2011 North Dakota was actually a net export state. That is, more cigarettes were taken out of North Dakota after purchase than were brought in. That will change should the new tax increase proposal become law. Smuggling into North Dakota will leap to almost 10 percent of total, in-state consumption. The figure would be higher but the Center report subtracts from its total any North Dakota cigarettes that are smuggled into Canada.

Legal paid sales would drop after such a hike and — as has happened elsewhere — politicians and people will be inclined to think that the decline is a function of quitting when it is actually more a function of smuggling and acquiring different tobacco products, such as pipe tobacco. The Mackinac Center estimates that North Dakota’s legal paid sales will drop by 4 million packs a year as a direct result of smuggling.

It’s worth noting that we have a real-world precedent for this. The Tax Foundation studied the impact of New York’s tax hikes on cigarettes ($5.85/pack) and found that as a result some 60% of the cigarettes in the state are smuggled in from lower-tax areas or bootlegged illegally to avoid taxes altogether.

North Dakota isn’t raising its taxes quite so dramatically, but even so it’s an illustration that this sort of policy really doesn’t work that well.

Rob Port is the editor of SayAnythingBlog.com. In 2011 he was a finalist for the Watch Dog of the Year from the Sam Adams Alliance and winner of the Americans For Prosperity Award for Online Excellence. In 2013 the Washington Post named SAB one of the nation's top state-based political blogs, and named Rob one of the state's best political reporters. He writes a weekly column for several North Dakota newspapers, and also serves as a policy fellow for the North Dakota Policy Council.

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  • camsaure

    Arn’t the reservations exempt from the tax also? How racist of Elliot. I guess folks will be driving to Devils Lake for more then great fishing if he gets his way.

  • nimrod

    If the smokers don’t go to the reservations, this bill will take food out of the mouths of the smoker’s children.

    • WOOF

      You and your kids pay for the Medicare scooters
      they ride to the store to buy cigarettes.

  • devilschild

    You can buy cigarettes on the internet and avoid paying higher taxes. This is the way of the future for smokers. I’m not encouraging. I’m just stating a fact.

    • http://sayanythingblog.com Rob

      And why wouldn’t it be that way?

      • devilschild

        What I meant was … I’m not encouraging smoking. I shop on the internet at least once a week and save money by doing so.

  • zipity

    Nu-uh. Raising the taxes on smokes will not increase smuggling. That’s like saying all the talk about gun control/bans would increase gun sales and NRA membership…

    Oh.

    Wait.

    Never mind…

  • John_Wayne_American

    I say, make our tax at least 25 cents a pack cheaper than any of our neighbors, if folks are going to buy smoke, lets be the ones to sell them, It won’t be long, and MN smugglers will be paying down our property taxes!

    • http://sayanythingblog.com Rob

      I agree, and let’s stop trying to use the tax code to control people while we’re at it.

  • opinion8ed

    How about taxing cigarettes on the Indian reservations since the federal government and the taxpayers are funding their bad habits

  • SportsDoc

    Plus, out here in the Wild West, many workers fly home every month or so. They could easily bring back suitcases full on each trip.

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