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Higher taxes and higher prices for cigarettes in Minnesota and the substitutions smokers make

In March, I wrote this entry to Bastiat’s Bastions in response to Jindal’s proposal to hike state cigarette taxes.  My critique was not so about raising tobacco taxes or not, but suggesting that the Louisiana Department of Revenue had done a poor job in estimating the effects of such taxes on state revenues, as I had a paper I was revising on tax revenues for Louisiana from increasing cigarette taxes. Well, Jindal has momentarily backed off of his push to raise cigarette taxes to help offset state revenue lost from eliminating the state income tax, but other states are pushing their cigarette taxes up.

I came across this news article from WCCO–CBS Minnesota, about how Minnesota is raising its cigarette taxes.  The difference in state cigarette taxes between Minnesota and it neighbors will result in $0.31 more per pack than in Wisconsin, but $2.39 more per pack than cigarettes sell for in North Dakota.  Remember a difference in $2.39 per pack amounts to a difference of almost $24 per carton of cigarettes. Such a large price difference will surely provide an incentive for some Minnesotans to buy their smokes in North Dakota.

Notice in the WCCO article that some Minnesotans are looking to stock up on as many cigarettes as they can buy now in anticipation of the higher prices that will start in two weeks.  Not only does it seem that the higher prices is causing smokers to substitute cigarettes now for cigarettes in the near future, but is also expected to cause smokers to switch to less taxed eCigarettes and roll-your-own cigarettes.

Another point I want to make is the one I make in the final paragraph of my previous blog post on cigarette taxes, that even though cigarette demand in Louisiana is estimated to be a bit on the elastic side, higher taxes are still estimated to increase tax revenues from cigarettes even though we have seen that revenues decline when prices are pushed up and demand is elastic.  I can assure you that all of this is as it should be, but the puzzle persists.  No one could figure this out in the spring term.  I will give the first person who correctly figures out this puzzle an extra 5 points in addition to the usual 5 points for a blog comment.


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