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Dramatic Tobacco Tax in Minnesota Increases are Driving Sales in the Dakotas.

By: Mike Marcil, Bakken.com

Dramatic Tobacco Tax in Minnesota Increases are Driving Sales in the Dakotas.

A few months ago I wrote about the effects of higher income tax rates in Minnesota and how these changes might impact the 200,000+ residents, businesses and communities along the border with North Dakota. The North Dakota legislature recently passed the largest tax reduction in state history on both personal and corporate income tax rates. Combined with prior years reductions, North Dakota has now lowered personal income tax rates by over 56% over the past decade. At the same time Minnesota has raised income tax rates to one of the highest in the nation.  The feedback I receive from legislators is this trend of continuing to gradually lower income tax rates each session will continue. It is my belief that at some point the income tax in North Dakota may simply fade away.  For most Minnesotans and North Dakotans these changes will be something they see in 2014 when they file their taxes, but already some businesses and residents have announced they are leaving Minnesota for North Dakota.  It will take years to evaluate the true impact these policy changes have on the border communities.

However, July 1 the tobacco taxes in Minnesota were raised dramatically for those 19% of Minnesotans who use tobacco and electronic cigarettes. For most Minnesotans who do not smoke they will likely not be too concerned with the tax changes in their personal lives, but for those people who use or sell tobacco and electronic cigarettes these changes have been immediate and highly impactful.

 

According to the CDC the people most impacted by changes in the price of tobacco products are less educated and fall under the poverty. The following are the percentages of people who use tobacco products by education and poverty status:

 

By Education

 

•   45.3% of adults with a GED diploma

•   34.6% of adults with 9–11 years of education

•   23.8% of adults with a high school diploma

•     9.3% of adults with an undergraduate college degree

•     5.0% of adults with a postgraduate college degree

 

By Poverty Status

 

•   29.0% of adults who live below the poverty level

•   17.9% of adults who live at or above the poverty level

 

Last week I spent several hours interviewing retailers and consumers on both sides of the river to see if these changes are actually affecting consumer behavior and the businesses who sell these products. I was astonished with the level of animosity and visceral commentary I witnessed on the Minnesota side of the border. Most of the people who use these products do not follow the legislative process and were frankly blindsided by the changes July 1st.  I visited a Clark gas station and convenience store in Moorhead who told me their sales are off by over 50% and that about 30% of the people who shop at the store will either cut back or quit the use of Tobacco products. The vast majority of the remaining 70% will now shop in North Dakota.  I also visited several retailers on the North Dakota side of the river who indicated their business was up significantly. One store manager told me that the owner of his store did not want him talking about the increase in sales as he smiled.

 

To illustrate this trend I compiled some average costs of leading tobacco products sold in the Minnesota and North Dakota stores I visited:

 

Brand                         ND                   SD                   MN                  Max Difference

Marlboro                    $3.94              $5.89              $8.30                          ($4.36)

Camel                         $4.59              $5.22              $7.60                          ($3.01)

Winston                      $3.91              $5.52              $8.30                          ($4.39)

Pal Mal                       $3.91              $4.51              $7.00                          ($3.09)

Old Gold                     $4.39              $5.62              $7.20                          ($2.81)

Newport                     $4.45              $7.20              $7.70                          ($3.25)

Swisher                      $3.09              $3.59              $4.19                          ($1.10)

Chewing Tobacco      $2.79              $2.84              $6.79                          ($4.00)

Electronic                   $9.95              $7.79              $17.95                       ($10.16)

 

Clearly for those people who can least afford to pay higher prices they will seek lower priced product across the border. That is simply how economics work. The larger the disparity between markets the more consumers will change behavior. We have seen this for years with Canadians who shop in North Dakota. However you do not need a passport, customs and a multi hour drive to get to Fargo from Moorhead. For somebody who buys a carton of Marlboro cigarettes by the carton in Minnesota it now costs $83.00 vs. $39.40 in North Dakota. That is a whopping $43.60 per carton!! For consumers who shift grocery stores for $2.50 in savings on store coupons you can only imagine how this will ultimately play out.

 

I talked to some smokers in Detroit Lakes MN who said there are already groups of people who combine their cash to have somebody drive to North Dakota to buy dozens of cartons to bring back.  This was only 5 days after the law took effect. I can imagine somebody will figure out they can drive from Minneapolis to Fargo and buy say 1000 cartons of Cigarettes and drive them back and sell them to their friends and make $2.00 per pack and still save their friends $2.36 per pack and make $20,000 in the process. This is what happens in New York every day.

 

In my opinion raising taxes on Tobacco will ultimately lower revenue for Minnesota especially when there are states like North Dakota and South Dakota with significantly lower priced products. I can understand how it would be hard for the average Minnesota resident to pack up and move across the border, but for a pack a day smoker can now save $1,500 per year by simply shopping across the border the numbers are highly compelling. It will be interesting to see what else these shoppers buy from these retailers in addition to tobacco products. My guess is we will continue to see this play out in the sales tax revenues collected in the Dakotas over the next few quarters.

 

About Mike Marcil

Mike Marcil, the founder of Bakken.com brings over 25 years of experience building innovative ventures in the media, technology, real estate, restaurant and retail industries. Mr. Marcil currently serves as the CEO Aartisan Fine Furniturewww.aartisan.comMaxwell’s Bar and Restaurantwww.maxwellsnd.com and Aalton Real Estate LLC. He is also passionately dedicated to innovative, affordable housing concepts that empower people. Most recently founding Hope for Homes, www.hopeforhomes.org a new market-based concept designed to prevent of homelessness.

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