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Rudy Takala's Columns

Doubling the “Good Taxes”

Two Minnesota Republicans, Sen. Carla Nelson and Rep. Mike Benson, have proposed doubling the state’s excise tax on cigarettes from $1.23 to $2.52 per pack. Nelson suggested that at some point in the future, the revenue could be used to replace some taxes on commercial property. “It’s getting rid of a bad tax for a good tax,” she said.
 
Before using it to lower commercial property taxes, the legislators suggested that the intent would be to pay back $2 billion borrowed from Minnesota’s schools to pay for state spending. They estimate the cigarette tax would raise about $160 million per year for the next two years.
 
The $2.52 tax would tie Minnesota with Wisconsin for having the 8th highest cigarette tax in the nation. Presently, Minnesota ranks 27th.
 
At $160 million per year, it would take a little over twelve years to pay back the $2 billion shift in education spending, allowing Minnesota to follow through on Sen. Nelson’s promise to lower “bad taxes” sometime in the year 2025. (Surely, legislators in 2025 will remember that promise!) Yet with stiff competition from neighboring low-tax states, even that revenue projection could be overblown.
 
South Dakota’s excise tax on cigarettes currently constitutes $1.53 per pack, while Iowa charges $1.36 and North Dakota just 44 cents. As Americans for Tax Reform has detailed (and PolitiFact has verified), raising excise taxes on products that residents can easily obtain for a lower price by driving across state lines often has a negative impact on revenue.
 
After Cook County in Illinois raised taxes on cigarettes by $1 per pack in 2006, a team of University of Illinois-Chicago researchers found in a sample survey of discarded cigarette packs in the county that 75 of them came from outside the area. Chicagoans and other residents of Cook County were flocking to neighboring Indiana to buy their cigarettes. And when South Carolina raised its excise tax in 2010, Georgians sold an additional 1.3 million packs in the six months to follow, while South Carolina saw its cigarette tax revenue actually decline.
 
The last time Minnesota raised its excise tax on cigarettes was in 2005, when then-Republican Gov. Tim Pawlenty passed a 75-cent-per-pack tax increase that he described as a “health impact fee.” Its passage, in addition to an in-door smoking ban signed in 2007, led to a vocal outcry from business owners at the time. It also led to a challenge in 2006 for the Republican gubernatorial nomination from Minneapolis bar owner Sue Jeffers, who now hosts a radio show in the state.
 
Commenting on the latest proposed hike, Jeffers pointed out the obvious. "Increased taxes hurt businesses and taxpayers. The higher taxes rarely meet promised revenue expectations as a tax hike drops the volume of taxable cigarettes. Gross profits to retailers and wholesalers lead to a loss of sales revenue and jobs. Higher cigarette taxes have also been linked to increased theft and gang activity."
 
The latest proposed tax hike comes a year after Minnesota legislators passed a record-spending budget totaling $35.7 billion over the biennium, an increase of 12% over the previous biennium. Out of that figure, $1.4 billion spent one-time funds that were borrowed from future tobacco settlement proceeds and shifts in school funding. The shifts in school funding came on top of money still owed by the state to cover shifts that had been used to pay for other budgets in previous years.
 
Considering that over the last fifty years Minnesota’s spending has increased with every budget except for those passed in 1960 and 2010, Sen. Nelson & Rep. Benson will have to find a lot of “good taxes” and keep on doubling them in coming years if they want to keep up with their state’s rate of spending.
Minnesota legislators need to realize that they have a spending problem, not a revenue problem. Short of that, it will take well beyond the year 2025 to resolve their budgeting issues.

2 Comments to Doubling the “Good Taxes”:

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Alexander R. Thompson on Friday, February 17, 2012 6:26 PM
What a brilliant application of ignorance by our supposed friends in District 30. Is the smoke so thick at the capitol, that they can't see which side of the aisle they're on? It's about time we get some republican Republicans in office. What do you say Minnesota? Are you with me?
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