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House committee approves cigarette tax hike
by Tom Scheck, Minnesota Public Radio
February 22, 2005

An increase in the cigarette tax to $1.47 a pack instead of 48 cents would generate $240 million to $250 million a year. (Photo by Mario Tama/Getty Images)

A Minnesota House committee on Tuesday voted to increase taxes on a pack of cigarettes. However, in its current form the proposed increase would do little to ease the state's budget crunch. The money raised from the tax increase would offset the elimination of fees on HMOs that provide insurance for high-risk groups.

St. Paul, Minn. — It's not a good time to be a smoker in Minnesota. Several weeks ago, the House Health Policy and Finance Committee approved a measure that would ban smoking statewide in many restaurants. Now, the committee has approved two bills that would raise taxes on a pack of cigarettes. One would raise the tax $1 from the current 48 cents per pack, while the other bill would raise it 54 cents.

Rep. Fran Bradley, R-Rochester, says the bill won't add revenue to the state's bank account. Instead, it would replace a fee on the state's HMOs. He says the move would keep more workers insured by reducing health insurance rates for small businesses.

"We all probably know small businesses and employees at small businesses who are either been dropped off already or are on the verge of being dropped off and anything we can do to reduce the burden down at the very vulnerable area has got to be better than where we are today," Bradley says.

Bradley say because the fee reduction on HMOs offsets the tax increase on smokers, his proposal wouldn't violate Gov. Pawlenty's no-new-taxes pledge.

The fees that HMOs pay into the Minnesota Comprehensive Health Association provide insurance to people who are considered high risk and were dropped from their coverage. Currently, the state's HMOs pay about 2 percent of their revenues into the fund.

Supporters of eliminating the HMO fees say they end up getting passed on to the 30 percent of Minnesotans in fully-insured programs. Small businesses cover most of the people in that group through employee health benefits.

Mike Hickey with the Minnesota chapter of the National Federation of Independent Business says his group opposes any tax increases, but believes the shift would help reduce health care costs.

"This is revenue-neutral, and this is going to provide a lot of help to a lot of small businesses and individuals that are really struggling to try to continue to provide health insurance," Hickey says.

But several members of the committee wonder if money raised from a cigarette tax increase could be better spent. Several lawmakers say they would prefer to see the money used to offset Gov. Pawlenty's proposed cuts to MinnesotaCare. About 27,000 people would lose coverage in the state-subsidized health insurance program under the governor's budget.

Rep. Barb Goodwin, DFL-Columbia Heights, supports that alternative move. She doesn't think the state's small businesses would actually see the benefit of the HMO fee cut.

"I don't believe that the cost savings will be passed on. I think this is a nice thing for the industry, but I don't think it's going to help people maintain or keep health insurance," says Goodwin.

Increasing cigarette taxes has backers among anti-smoking advocates who believe higher taxes will reduce smoking rates.

Matt Flory with the American Cancer Society says a $1-a-pack cigarette tax increase would especially reduce rates among teenagers who don't have as much discretionary income as adults.

"Increasing the tobacco tax will reduce smoking. We have solid research on this. There have been several states that have increased the tax -- quite a few in the last few years," says Flory.

The proposal approved in the House committee isn't the only cigarette tax increase under consideration.

Several lawmakers want to use revenues from a higher tobacco tax to reduce taxes on doctors, dentists and other health care providers. Sen. Linda Berglin, DFL-Minneapolis, would prefer to raise the cigarette tax and reduce a fee on the state's nursing homes. She opposes Rep. Bradley's bill.

The wild card in all of these proposals for higher cigarette taxes is Gov. Pawlenty. He has been steadfast in his opposition to higher taxes, but he said he would support a cigarette tax increase if it offsets a different tax. A spokesman says he would have to look closely at any proposal to make sure it's revenue neutral.