MINNESOTA LOSES AN ESTIMATED $12.2 MILLION PER YEAR IN CIGARETTE TAXES DUE TO SMUGGLING. IN HIRING FOUR FULL-TIME INVESTIGATORS, THE HOPE WAS TO INCREASE CIGARETTE TAX REVENUES BY $500,000 IN THE FIRST YEAR OF OPERATION. THIS REVENUE INCREASE WAS EXPECTED TO OCCUR AS THE INVESTIGATORS' ACTIVITIES FORCED A DECREASE IN UNTAXED CIGARETTES THEREBY FORCING MORE PURCHASERS INTO THE LEGITIMATE (UNTAXED) MARKET. THE SIMULTANEOUS EQUATION MODEL ESTIMATED BY THE TWO-STAGE LEAST SQUARES TECHNIQUE IS COMPOSED OF A SUPPLY AND A DEMAND EQUATION, WHERE THE LEVELS OF CIGARETTE SUPPLY AND DEMAND ARE MEASURED BY CIGARETTE TAXES COLLECTED. CIGARETTE PRICES WERE FOUND TO HAVE A SIGNIFICANT EFFECT ON CIGARETTE SUPPLY BUT NOT ON CIGARETTE DEMAND. NEITHER THE PERSONAL INCOME LEVEL, POPULATION LEVEL, NOR LEGISLATIVE ATTEMPTS TO ALTER SMOKING HABITS HAVE HAD A SIGNIFICANT EFFECT ON CIGARETTE TAXES COLLECTED PRIOR TO JULY 1976. USING THE MODEL, CIGARETTE TAX REVENUES ARE PROJECTED BEYOND JULY 1976 AND ARE COMPARED TO ACTUAL TAX REVENUES COLLECTED OVER THE SAME PERIOD; HOWEVER, THE STATISTICAL ERROR FOUND AROUND THE PREDICTED REVENUE LEVELS IS TOO LARGE TO GAUGE WHETHER THE INVESTIGATORS HAVE MET THEIR GOAL OF RAISING CIGARETTE TAX REVENUES. TABULAR DATA, MATHEMATICAL EQUATIONS, AND REFERENCES ARE PROVIDED. (AUTHOR ABSTRACT MODIFIED--RCB)