Cigarette sellers say tax hike will drive buyers to other states

Maplewood Tobacco
Maplewood Tobacco store manager Anan Barbarawi says business is booming, having taken off about the time the state Legislature approved the cigarette tax increase.
MPR News/Mark Zdechlik

Business is booming at Maplewood Tobacco, as a steady stream of customers tries to stock up before Minnesota's cigarette tax jumps $1.60 a pack on July 1.

"People been buying like crazy. I mean we've got a few customers buying 10 cartons, 20 cartons, cases of little cigars," store manager Anan Barbarawi said. "Every time they buy something they tell us how exactly they're saving. I mean, they tell us, 'here we saved $160 bucks.' "

But the surge in cigarette sales that is keeping him busy will likely soon end. Like other business owners who rely heavily on tobacco sales, Barbarawi fears hard times lie ahead when smokers will have to pay a tax of $2.83 a pack.

Some also predict the tax hike might backfire, making cigarettes so expensive that Minnesotans will head to neighboring states for cheaper cigarettes.

"The sales [are] going to be rising until July 1," Barbarawi said. "Once the increase is already there, I think our business is going to die. It's going to be a huge problem. It's going to be a life changer, I think, for a lot of business owners like me and others."

Because of the tax hike, cigarette sellers in Minnesota will lose the competitive advantage they had over Wisconsin, where the cigarette tax is $2.52 a pack. Cigarettes in Minnesota will become even more expensive than they already are relative to cigarettes in Iowa and the Dakotas.

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North Dakota's cigarette tax is 44 cents a pack; South Dakota's $1.53; and Iowa's $1.36.

Tom Briant
Tom Briant, executive director of the Minnesota Wholesale Marketers Association, is convinced the higher cigarette tax is going to hurt the people he represents and other Minnesota businesses.
MPR Photo/Mark Zdechlik

"Minnesotans will cross borders into neighboring states and buy cigarettes at a much lower price and maybe buy other things like gas and other products," said Tom Briant, executive director of the Minnesota Wholesale Marketers Association.

Briant is convinced the higher cigarette tax is going to hurt the people he represents and other Minnesota businesses.

The biggest price difference will be between Minnesota and North Dakota. Starting July 1, a pack of Marlboros that will cost about $8 in Moorhead, Minn., will cost only about $5 across the Red River in Fargo, N.D.

"It's going to be very detrimental not only to Minnesotans who smoke but to a lot of family-owned retail businesses who rely on cigarette and tobacco sales to remain in business," Briant said. "This is a job-killer tax. It's not a revenue-raiser tax."

Smokedale Tobacco
In the St. Paul suburb of Oakdale "Smokedale Tobacco" owner Hatem Younis is bracing for a customer exodus.
MPR Photo/Mark Zdechlik

In the St. Paul suburb of Oakdale, Smokedale Tobacco owner Hatem Younis is bracing for a big drop in sales.

"All of the people who buy the big bulk of cigarettes are coming from Wisconsin, so we are losing 70 percent of the sales in cigarettes in this location," Younis said.

Younis is convinced that Minnesota's $1.60 tobacco tax increase will change buying patterns so much that the state will fail to meet capture $434 million in projected revenues over two years. Indeed, he thinks Minnesota will collect less in tobacco taxes than it currently does. The state collected $371.2 million in cigarette taxes in fiscal year 2012.

"This will cause a big loss on the taxes the state's going to collect," he said. "This is for sure."

Along with crossing the border, Minnesotans could save money on cigarettes by purchasing them from tribal stores. The state's Indian tribes pay half of state cigarette taxes and can set their own prices for cigarettes. All other retailers must adhere to state-set minimum prices.

Still, Minnesota Revenue Commissioner Myron Frans is not worried the tax will fail to meet its revenue projections.

"We're very confident. One of the benefits we've had is looking at what's happened in other states," Frans said. "Obviously this is not a new phenomenon. Excise taxes have been increased around the country."

Tobacco tax revenue projections have fallen short in several states. Ultimately, Dayton administration officials say the goal of the higher tax is to reduce smoking, not to raise money.

Myron Frans
Minnesota Revenue Commissioner Myron Frans says he's not worried the tax will fail to meet its revenue projections.
MPR Photo/Mark Zdechlik

Some smokers say their biggest concern is price.

At Maplewood Tobacco, Leroy Biczkowski recently paid $110 for 20 packs of cigarettes. The same purchase will cost him more than $140 in a few weeks.

Biczkowski, 72, of Maplewood, said he'll do whatever he can to avoid paying the higher tax, including driving to Wisconsin.

"That ain't that far," He said.

It is illegal for a Minnesotan to bring in more than one carton of cigarettes from another state. Still, Biczkowski is contemplating weekly cigarette runs to Wisconsin, unless officials start border checks for illegal tobacco.

"They can't keep track of you that way, unless they stop you every time you show up," he said.

Frans, the state revenue commissioner, said his department will monitor cross-border tobacco sales and enforce the law.