Even if people quit smoking, state will reap plenty from cigarette tax hike

Bob Moffitt of the local American Lung Association called my attention today to an old NewsCut post which connected the rate of a cigarette tax increase to the number of people who stop smoking because of it.

Contained therein, was a CNBC interview featuring the late, great Mark Haines questioning the logic of using a tax to close a funding gap in state finances while intending it to also encourage people to give up buying cigarettes. If people quit smoking, the state loses revenue. It can’t, the theory goes, afford people kicking the habit.

“The increase per pack way offsets the decline in smoking, ” the advocate of higher cigarette taxes responded. “Every state that has increased its cigarette tax significantly, has seen dramatic increases in revenue, even while tobacco consumption declines.”

Is that true in Minnesota? Decidedly so.

In 2005, Minnesota raised cigarette taxes by charging a fee to wholesalers — 75 cents a pack — which was passed along to the customers. Tobacco tax revenue went from $174 million to $446 million in just one year.

Maybe a lot of people quit smoking during that initial jump, but the revenue figures do not suggest tobacco taxes were ever imperiled by people quitting.

According to the Tax Policy Center, Minnesota tobacco tax revenues totaled $448 million in 2007 (an increase, two years after the tax increase), dropping to $419 million in 2008, before increasing to $423 million in 2009 and $428 million in 2010.

So, tobacco tax revenue dropped only 4% since the “health impact fee” was imposed on smokers.

The new Minnesota tax increase of $1.60 will raise another $434 million, showing almost no financial impact from people quitting.

There may be a point at which it’s financially illogical to raise the price of cigarettes. But the data — so far — indicate we’re nowhere near it.

  • Bob Moffitt

    That 4% decrease since 2005 sounds about right, according to the surveys and projections I’ve seen.

    The statistic to watch — and this won’t be available for a couple years — is youth smoking in Minnesota. If Minnesota is like other states, we should see a significant drop in the number of young people who smoke. In time, this will make Minnesota’s adult smoking rate drop, too. If you reach college age and don’t use tobacco, it is very unlikely you ever will.

    Thanks for the h/t, Bob!

  • BJ

    //The new Minnesota tax increase of $1.60 will raise another $434 million, showing almost no financial impact from people quitting.

    How much is the Stadium costing the State (and County and City)? If the governor is using this to fund the stadium, shouldn’t this pay it off, the public share, in around 1-2 years?

  • http://www.youtube.com/steamlite Steamlite E cigarette support

    Maybe a lot of people quit smoking during that initial jump, but the
    revenue figures do not suggest tobacco taxes were ever imperiled by
    people quitting.