The great Minnesota tobacco exodus

It’s been almost two months since Ed’s home state of Minnesota decided to fatten their coffers by adding an additional $1.50 per pack sin tax on cigarettes. This may not have had a big impact on Ed, as a non-smoker, but there are still plenty of folks in his state who indulge. Did it cut down on smoking? Maybe, at least for some people. And good for them! But for others – particularly those who live near the border with North Dakota – a different type of temptation lurked, and in many cases it was too much to resist.

If you’re a smoker living in Minnesota near the North Dakota border, you’ve undoubtedly discovered that you can save a lot by driving a little. Since Minnesota’s cigarette tax jumped by around $1.50 a pack on July 1st, tobacco wholesalers have noticed a dramatic drop in sales.

Wholesalers like Henry Knoll have noticed a dramatic drop in sales. Knoll is president of Frank McKone Cigar Co. in Fargo. He distributes to retailers within about 200 miles of Fargo-Moorhead.”Petro Serve USA” CEO Kent Satrang says the shift to North Dakota was almost immediate. Satrang says the convenience store industry lobbied the legislature for a smaller tax increase.

The tax did bring in a brief, short-term bump in tax revenue, much of which will apparently pay for a new stadium for the Vikings, but that was only until shoppers figured out the tax game that was afoot. After that they were heading for their more tax friendly neighbors in the Roughrider State.

One of the most startling things about this now all-too-common phenomenon is the way that it distorts the normal ebb and flow of competitive markets. There was a time, back in the day, when businesses selling a given product would engage in competitive pricing competitions to attract customers, much to the benefit and delight of shoppers. The “gas wars‘ of the 1960s were one of the best examples. But in the modern era of sin taxes – including both tobacco and gas – such competition is pretty much a thing of the past. If you are a convenience store owner in Minnesota near the border of North Dakota, you can’t lower your prices, even temporarily, to bring your customers back. When the profit margin on a pack of smokes has already plummeted, you simply can’t slash your price at the register further to make up for an unfair advantage provided by your own state government.

The result, as always, is that your customers cross the state lines, your business profits sag, government revenues fail miserably to meet expectations and the neighboring, more tax friendly state reaps the benefits. Congratulations, Minnesota. You’re still solving problems the old fashioned way, aren’t you?