Smells Like Tobacco Taxes

Smokes could be rising in several states, but lawmakers may snub out proposals

OAK BROOK, Ill. -- Cigarette taxation has been getting front-burner attention around the nation recently.

Proposals have been making headlines in Indiana, Kentucky, Mississippi and Iowa.


Many Indiana lawmakers are frowning on Governor Mitch Daniels' proposed tax increase on cigarettes, despite claims that his only reason for pitching it is to reduce smoking and deter youths from picking up the habit, reported the Associated Press.

Daniels' fellow Republicans [image-nocss] who control the General Assembly have shown little support for the proposal, and some have shunned it outright. Top Democrats have also questioned it, wondering where the extra tax revenue would go. He can call it what he wants to, but if it looks like a tax and it smells like a tax and the rest of that, then it's a tax, State Senator Vi Simpson (D) said.

Daniels asked the General Assembly during his State of the State speech last week to raise the tax by 25 cents per pack. Lawmakers raised it from 15.5 cents per pack to 55.5 cents in 2002 to help shore up the state's finances.

The governor said in his speech that Indiana was one of the most unhealthy states, and reducing smokingespecially among youthwas the biggest step to improve wellness. He reiterated: This is a health matter. It's not about money or taxation.

House Speaker Brian Bosma (R) and Senate President Pro Tem Robert Garton (R) did not dismiss the proposal but stopped short of endorsing it. Several lawmakers, however, said its chances of passing were slim. They don't appear to be good right now, and I think part of the problem is that although the governor says it is a health care issue, most legislators aren't willing to vote for taxes unless they know where the money is going, said Senate Tax Committee Chairman Luke Kenley (R). Kenley said it would be especially difficult to get a tax increase through the closely divided House in a year in which all 100 of that chamber's seats will be on the November ballot. Republicans control the chamber 52 to 48.

Administration officials said a 25-cent increase in the current 55.5-cent per-pack tax would raise between $115 million to $150 million a year in tax revenue, and a new rate of 80.5 cents would still be lower than all neighboring states except Kentucky's 30-cent tax.


A plan for Kentucky to keep the money its smokers contribute to a 1998 settlement between tobacco companies and 46 states risks adding as much as $4 to the cost of a carton, according to the Louisville Courier-Journal, citing a state lawmaker who also works for a Kentucky cigarette company.

The proposal would not only cost smokers more money, but also be unfair to tobacco companies that are part of the settlement and give an advantage to companies that aren't going along with it, said State Representative Rob Wilkey (D), who is general counsel for Commonwealth Brands, Bowling Green, Ky.

"Participating manufacturers to the Master Settlement Agreement (MSA) would get hammered with an additional tax," he told the newspaper.

Tobacco companies that are not part of the agreement support the plan and say there likely would not be any increase and, if there were, it would be less than 1 cent per pack. Kentucky stands to gain $130 million a year in tax revenues, supporters said.

The new tax would be borne by all manufacturers who sell in Kentucky. "I don't believe there's going to be any price increases at all. If there are, it will be at the margin," Ron Tully, vice president of National Tobacco Co. of Louisville, told the House budget committee.

At issue is a proposal by the group of nonparticipating companies that would replace payments Kentucky gets from tobacco companies under the agreement with a tax of about $4 per carton on cigarettes sold in Kentucky.

Companies participating in the agreement typically pay about $4 per carton to the settlement fund.

Gov. Ernie Fletcher strongly endorsed the idea in his State of the Commonwealth address last week, said the report. He and advocates of the plan said it is not a tax increase but simply a way for Kentucky to get back a fair share of what its smokers pay to the master settlement.

The proposal has not yet been filed as a bill. The committee is scheduled to resume debate on the proposal next week, the report said.

The MSA required the states to drop claims of damages against tobacco companies, and in exchange, the companies agreed to make annual payments to the states. Kentucky will receive $108.6 million this fiscal year under the agreement.

Tully also told the committee that Kentucky got a bad deal in the agreement. Kentucky sells about 3% of all cigarettes sold in the United States, but gets 1.76% of the money collected and distributed by the MSA. He said the state would gain about $130 million a year by keeping what its smokers pay into the fund.

The proposal is opposed by an original signer of the agreementPhilip Morris USA, as well as companies like Commonwealth Brands that later joined the agreement, the report said.

Nonparticipating companies like Tully's would not be hurt because the new tax would replace $4-per-carton payments they pay to an escrow fund to be used as protection against state lawsuits, said the paper.

Wilkey said the proposal would violate the agreement, prompt lawsuits from tobacco companies and put the state at risk of having to give back more than $750 million it has received under the agreement.

Bill Phelps, a spokesperson for PM USA, told the Courier-Journal that the company has not seen any proposal from Fletcher, but it opposes the one offered by small manufacturers. "Does Kentucky have the right to renegotiate the terms?" he asked. "I would say no. Making changes like those in this proposal could put the [MSA] in serious jeopardy in Kentucky."


The Mississippi House late last week removed a procedural block from a bill that would increase Mississippi's cigarette tax and phase out the 7% grocery tax by 2014, reported the Associated Press.

The bill will land on Governor Haley Barbour's desk in the next few days, forcing him to decide whether to veto it, sign it or let it become law without his signature.

Republican Barbour said in his State of the State address last week that he opposes both parts of the bill. He said he is against any tax increase, and he thinks it is the wrong time for a grocery tax reduction because of economic uncertainties caused by Hurricane Katrina.

Mississippi has one of the lowest cigarette taxes and the highest state grocery tax rate in the nation, officials say. The state charges 18 cents excise tax on every pack of cigarettes. The bill would bump that up to 75 cents a pack this July 1 and $1 a pack a year later.


And during a Quad-City visit to push his legislative agenda, Iowa Governor Tom Vilsack said last week that an 80-cent tax on cigarettes would save lives and help small businesses afford catastrophic health-care coverage for their workers, reported the Quad City Times. He also pressed for the spending of more money on early childhood education, said the report.

The tobacco tax increase is controversial in the Quad-Cities, where Illinois' higher tax has sent people flowing across the Mississippi River to buy cigarettes, it added.

Vilsack said the state's tobacco tax of 36 cents a pack is one of the lowest in the country. I think this is one tax that people genuinely think ought to be increased, he said.

The governor also has proposed a tax increase on beer, something Vilsack said he did because people have complained that cigarettes are often the sole target of such hikes.