Preparing for SCHIP

Tobacco industry execs expect repercussions as excise tax hike seems imminent

Abbie Westra, Director, Editorial, CSP

PARAMUS, N.J. -- With the expanded SCHIP bill steadily streaming down the legislative pipeline, tobacco companies are preparing for its impending passage into law and the related tobacco-tax hike that will come with in. It seems there is not much else they can do at this point. "How do you prepare for a forest fire of this kind of monumental proportions with a garden hose?" Bhavani Parameswar, president of tobacco company King Maker Marketing Inc., told CSP Daily News.

The House of Representatives voted a week ago to approve the expansion of the State Children's [image-nocss] Health Insurance Program, which calls for an increase in excise taxes on tobacco products. The Senate plans to vote on the bill as early as today or at the beginning of next week.

"This is something of a foregone conclusion," said Parameswar, calling the bill a low-hanging fruit for politicians. "We'll just get these things done and out of the way before we dive into the stimulus [package] or the Iraq timetable."

Opposition to the bill has been heard across the industry. Those against the bill point to the potentially huge job loss, as well as the threat of an empowered black market.

For many tobacco manufacturers, the biggest problem with the SCHIP bill is that it puts a national insurance program on the back of a struggling industry, one that has seen a decline is cigarette sales at a rate of 2% to 4% per year. After the proposed 61-cent increase, explained Frank Lester, director of communications for Reynolds American Inc., that decline could accelerate to 6% to 8% per year.

"It's bad policy to rely on an unstable, unreliable funding source for an important government program," he said.

"The federal government will realize less and less revenue from that cigarette tax over time, and then ultimately we think they will need to come back to find a way to fill the future gaps in funding," added David Sutton, a spokesperson for Altria, parent company of Philip Morris USA.

For the larger tobacco companies, such as Reynolds American, the concern is for their retail partners, for whom tobacco can represent as much as 34% or more of their gross profit. "We feel that with our product line, our product portfolio, we're very well positioned to thrive in the future, and our retail or wholesale partners can thrive with us as we respond to the changing dynamics of the marketplace," Lester said.

For Parameswar, the stakes are higher, and she has focused her energy on opposing the roll-your-own tobacco tax increase to $23.53 per pound.

Ron Tully of the Council of Independent Tobacco Manufacturers of America released a statement earlier this week calling for legislators to make the RYO tax rate proportionate the 156% increase on cigarettes, or to return to the $8.92 per pound rate proposed in an earlier version of the SCHIP expansion.

"If this tax rate change for roll-your-own tobacco does not happen," Tully said, "specialty roll-your-own manufacturers will be forced to close their doors, specialty wholesalers and retailers who focus on these types of products will go out of business, unemployment lines will expand, states will lose vital excise tax and MSA revenues, and the SCHIP program itself may have to expand further to accommodate 10,000 new client families."

Parameswar echoed Tully's sentiments. To her, the SCHIP bill would not only fail to increase revenue for the program; it would only kill the industry. "[When addressing] legislators, I say, 'I'm here today not to tell you to improve the SCHIP bill, not to tell you there will be black markets. You know all that. I am here to tell you that you must ban this product. Please ban this product. It really doesn't help to keep it legal and then to tie us up in knots like this'."

"It's not that the consumers are addicted to tobacco, it's the legislators who are addicted to the revenues," she said.A free by Altria Client Services and Philip Morris USA provides a simple, fill-in-the-blank form to allow retailers to voice their displeasure with the bill. Retailers can also call a hotline at (866) 527-4494 to reach out to their legislators.

Abbie Westra, CSP/Winsight By Abbie Westra, Director, Editorial, CSP
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