Sales and excise taxes are slightly different animals. A sales tax is one that the government imposes at the point of sale on retail goods, like clothing. The retailer collects the tax and passes it on to the state. In contrast, one pays an excise tax on purchases of specific goods, such as gasoline and cigarettes, and it is often included in the product’s price. Many products carry both.
The Minnesota Department of Revenue has announced increases on sales and excise taxes on cigarette purchases. Effective for sales on or after Jan. 1, 2015, the cigarette sales tax will increase by 1.4¢. The state’s formula for calculating this tax results in an increase from the current rate of 51.2¢ to 52.6¢ per pack of 20 cigarettes. For packs with other than 20 cigarettes, the tax must be adjusted proportionally.
In addition, the Commissioner of Revenue has set the new excise tax rate at 145 mills, or 14.5¢ on each cigarette, also effective for sales on or after Jan. 1, 2015. This represents an increase of .35¢ from the current rate of 141.5 mills or 14.15¢ per cigarette. The new excise tax rate effective Jan. 1, 2015 will therefore be $2.90 per pack of 20 cigarettes, as compared to the current rate of $2.83 per pack of 20 cigarettes.
In a ranking of state cigarette excise tax rates, the Campaign for Tobacco-Free Kids shows that the average excise tax for all states is $1.54 per pack. Minnesota’s current rate of $2.83 per pack puts the state at seventh-highest. Chicago has the highest excise tax, $6.16 per pack (the state of Illinois is 17th at $1.98), and Missouri is the lowest, at $.17 per pack.
Aggregate revenue from cigarette taxes
According to North Carolina-based RJ Reynolds, the second largest tobacco company in the United States, cigarettes are one of the most heavily taxed consumer products in the country. Federal, state, and local governments collect more money from the sale of cigarettes than retailers, wholesalers, farmers, and manufacturers combined.
In fact, RJ Reynolds reports, since 1998, governments at all levels have collected more than $528.5 billion in cigarette taxes (including sales tax). For the fiscal year 2013, settlement payments, combined with federal, and state and local taxes on cigarettes amounted to more than $43.9 billion. Here is how those taxes break down:
- Federal excise taxes: $14,166,973,085
- State and local excise taxes: $17,182,878,658
- State cigarette sales taxes: $4,043,504,916
- Tobacco settlement payments: $8,512,945,925
Avoiding cigarette taxes
The Tax Foundation notes that large differentials in the taxes imposed from one state to another create a black market for cigarettes. These “smuggled” cigarettes make up substantial portions of cigarette consumption in many states. In Minnesota, smuggled cigarettes account for 22.4 percent of total cigarettes consumed, which makes it the state with the 14th highest percentage of black market cigarettes.