Despite Regressivity, Tobacco Tax Increase was Good Policy
In an article published last week, Minnesota 2020 revealed the error in a conservative claim made in a Rochester Post Bulletin commentary that “each and every Minnesotan” is going to pay higher taxes as a result of the 2013 tax act. The preponderance of middle income Minnesotans will actually pay lower—not higher—taxes as a result of the tax changes made during the last 2013 session.
The flaw in the conservative analysis of the 2013 tax act was in assuming that the tobacco tax increase* will apply uniformly to all Minnesota taxpayers, which is not the case. Approximately 84 percent of Minnesota adults do not smoke and will not be affected by the tobacco tax increase. After factoring out the impact of tobacco tax increases, it is likely that the majority of non-smoking middle income Minnesotans will see a tax reduction. In fact, as noted in last week’s article, only 0.1 percent of the net increase in non-tobacco taxes will be borne by Minnesota households with annual income below $146,400, which averages out to 29 cents per household per year.†
However, the impact of the 2013 tax act will obviously be much steeper for Minnesota smokers. The impact of the cigarette tax increase will hit low income smokers particularly hard, since tobacco taxes are more regressive than any other state tax according to the 2013 Minnesota Tax Incidence Study.
Minnesota 2020 has generally favored increased dependence on progressive taxes and reduced dependence on regressive taxes, but we have always recognized that regressivity/progressivity is only one of several criteria by which a tax can be evaluated. A tax can also be evaluated based on its ability to defray public costs associated with harmful activities and as a way of discouraging those same activities. On both these criteria, the tobacco tax increase in the 2013 tax act scores highly.
According to a 2010 report from Blue Cross and Blue Shield of Minnesota, “In Minnesota, smoking was responsible for $2.87 billion in excess medical expenditures in 2007—a per capita expense of $554 for every man, woman and child in the state.” The excess medical expenses associated with smoking include costs for physician and other professional health services, hospital and nursing home care, and prescription drugs.
Another 2010 study conducted by researchers at Penn State University looked beyond the direct medical expenses of smoking to include costs associated with workplace productivity and premature death losses. After factoring in these costs, the Penn State study concluded that “in Minnesota the annual direct costs to the economy attributable to smoking were in excess of $5 billion.” The study went on to note that “the combined medical costs and productivity losses attributable to each pack of cigarettes sold [in Minnesota] are approximately $20.83 per pack.”
Undoubtedly, a significant portion of these direct losses translate into increased public expenses and reduced public revenue. The state tax per pack of cigarettes—$2.83 after the 2013 increase‡—is not excessive relative to the cost that cigarette smoking imposes on society.
In addition to helping defray the costs associated with tobacco usage, it is an established fact that increases in tobacco taxes lead to a reduced consumption of tobacco products. This is especially true among lower income households and teens, who are especially price sensitive. Thus, the increase in tobacco taxes has the additional benefit of not only defraying the societal costs of tobacco usage, but reducing these costs in future years, as well as improving health and saving lives—especially among lower income households where cigarette usage is most prevalent, according to the 2010 Minnesota Adult Tobacco Survey.
It is refreshing to see conservative legislators finally taking an interest in reducing tax regressivity, as revealed in the Post Bulletin commentary. Certainly such attitudes among right wing policymakers were rare over the last ten years, as recurring state budget deficits were resolved through repeated slashing of property tax relief programs, leading to increases in regressive property taxes. Hopefully the newfound conservative interest in tax regressivity will be more than a temporary and politically expedient fad.
However, the regressivity of the tobacco tax increase in the 2013 tax act is justified on the grounds of other societal benefits that it advances, such as increased revenue, improved health, and saved lives. After all, as a state and as a society, we can do more for low income people than simply giving them access to cheap carcinogens.
Furthermore, the revenue generated by 2013 tax act will benefit all Minnesotans—especially low and moderate income families—by helping increase state funding for:
- Minnesota public schools, which will reduce class sizes, improve course offerings, and partially offset the sharp decline in real per pupil state aid over the last decade. This includes new investments designed to close Minnesota’s achievement gap.
- All-day kindergarten, which will reduce expenses for parents and help kids enter grade school with the skills they need to succeed.
- Early Learning Scholarships, which will allow young children from low-income families to benefit from early childhood education.
- MnSCU and the University of Minnesota, which will stabilize tuition costs and replace a portion of the state funding decline that occurred over the last ten years.
- The Minnesota Job Creation Fund, the Minnesota Investment Fund, and other business development and adult workforce training programs, which will create a skilled workforce and grow Minnesota businesses. This includes funding for initiatives specifically designed to help economically distressed regions of the state.
- Programs to provide job training for at-risk youth and improve employment opportunities for people with physical and mental disabilities.
- Housing initiatives, which will increase the supply of affordable housing, reduce family homelessness, improve housing stability for people with mental illnesses, and rehabilitate residential properties.
- The renters property tax refund and a new homestead credit refund, which will provide targeted property tax relief for low and moderate income households.
- Civil legal services and the Board of Public Defense, which will reduce caseloads and help low income families and individuals get legal assistance.
- The Department of Veterans Affairs to improve access to health care for Minnesota veterans.
- A variety of measures to improve access to insurance and health care for a wide variety of Minnesotans.
These and other benefits of legislation passed during the 2013 session are described in more detail in a recent Minnesota Budget Project publication.
Conservative gripes about the 2013 tax act are based on a flawed interpretation of Revenue Department information and a failure to take into account the numerous benefits that increased state revenue will make possible. Many of these benefits will accrue to the middle and lower income families and are well worth the additional 29 cents per year that the average non-smoking Minnesota household with income below $146,400 will pay. Households with smokers will pay more, but this is entirely justified based on the increased societal costs resulting from tobacco use and the increased incentive to quit smoking that the tobacco tax increase will produce.
In 2013, progressive public policymakers delivered on their promise to make Minnesota’s tax system less regressive, improve Minnesotans’ quality of life by restoring public investments in education and other important public assets, and balance the state budget without shifts and gimmicks. Furthermore, progressives accomplished this while at the same time reducing taxes for most middle income families. Despite conservative naysaying, the 2013 Legislature made great strides toward tax fairness, revenue adequacy, and sound fiscal management.
*As used here, the term “tobacco tax increase” will refer to the cigarette and tobacco tax increases in the 2013 tax act. The cigarette and tobacco tax results presented in the Department of Revenue (DOR) incidence analysis of the tax act includes a tax reduction resulting from an increase in the small brewers’ credit, which DOR staff characterize as negligible.
†Given the margin of error in the DOR incidence analysis, it would be appropriate to characterize this tiny increase as approximately zero.
‡After the 2013 tobacco tax increase, the total average retail price for a pack of cigarettes in Minnesota including taxes is $6.44.