Minnesota's fiscal health is the best that it has been in more than a decade. With the recent news that the state has a budget surplus — with about $1.2 billion to work with in the upcoming legislative session — it is time for state leaders to take this opportunity to make some changes to the tax code that will help businesses and middle-class taxpayers.
We applaud Gov. Mark Dayton and legislators for looking for solutions. As retailers from around Minnesota, we have a simple solution: Repeal the autopilot tax on tobacco products in Minnesota. This is a regressive tax on Minnesota adult smokers and retailers with no ongoing legislative oversight.
This autopilot tax increase was part of a massive, $1.60-per-pack cigarette tax increase passed by the Legislature and signed into law in 2013. Minnesota is the only state to impose an annual adjustment factor that automatically increases the tobacco tax. The state currently has the seventh-highest tobacco tax in the country, and that will get worse when the tax jumps to more than $3.50 per pack of cigarettes on Jan. 1. That is $2.86 more per pack than in North Dakota, over $2 more than in South Dakota and Iowa, and 60 cents more than in Wisconsin.
As demonstrated by the 2015 automatic increase, tax increases will continually force Minnesotans who legally smoke to seek out less-expensive outlets to avoid the state's high tobacco tax rate — today, that is a simple drive to a neighboring state to buy cigarettes along with other consumer products.
Small independent retailers along our borders are suffering the most. Many retailers have simply closed their doors, and others have reported declines in sales of over 50 percent. In fact, a recent study suggested that Minnesota is losing more than $38 million annually in sales tax on nontobacco products because of cross-border sales.
Not only have our unchecked, automatically rising tobacco taxes had an impact on retailers, jobs and communities, but Revenue Department Commissioner Cynthia Bauerly was quoted last winter in the Star Tribune as describing the movement of untaxed tobacco products across state lines as "a more organized, or a more robust presence of smuggling." Clearly, we have taxed our products at a level where smuggling cigarettes has become its own industry. Now, to address smuggling, the Revenue Department says it needs upward of $1 million to fund almost a dozen new employees to police cigarette smugglers. Adding to that, state officials said last year that smuggling would cost Minnesota $2.6 million over the next two years.
So, according to recent economic studies and the Minnesota Department of Revenue, this tax is costing Minnesota more than $41.6 million per year and generates only about $20 million per year in additional revenue. It is time to cut our losses and eliminate the automatic increase in the state's tobacco tax. Doing so protects our border communities, brings sales back to our small-town retailers and stops a regressive tax on adult consumers.
As the governor and legislators look for opportunities to provide middle-class tax relief, it is time for them to give our state's retailers a smoke break.
Lance Klatt is executive director of the Minnesota Service Station and Convenience Store Association.
