BARRINGTON, Ill. -- Moist smokeless tobacco (MST) volume is increasing substantively faster in states employing a weight-based tax versus states that use an Ad Valorem tax, which is typically expressed as a percentage of the wholesale price, according to a recently completed analysis by retail and foodservice consulting firm Willard Bishop.
The analysis shows that while the total United States, excluding the nine states using a weight-based tax, continues to experience strong can volume growth of 7.5% versus the previous year, states using a weight-based [image-nocss] tax reported even stronger growth of 10.7%. (To view the chart, click the Download Now button, below.)
David Bishop, vice president of convenience and small store formats practices at Barrington, Ill.-based Willard Bishop, said, This analysis illustrates that there's latent growth in the category that may be realized if states convert to a weight-based tax.
And, at the close of 2006, there were still 40 states using an Ad Valorem type of tax, which implies that continued changes to the current taxing structure could drive incremental category growth.
Secondly, the faster volume growth in Tier 1 helps to accelerate gross profit dollar growth due to its higher penny-profit potential versus the other price tiers, Bishop added.
Previous studies conducted by Willard Bishop document that in some cases, the gross profit per unit sold for Tier 1 products is more than twice that of Tier 3 products.
Finally, all the price tiers experienced stronger growth rates in the weight-based states, underscoring that the change is probably good for all MST products, said Bishop. This should allay concerns that a conversion creates competitive advantage for any one product manufacturer, he said.
The analysis also demonstrates that the benefit of a weight-base tax also extends to the state governments. After studying the impact of recent conversions in New Jersey (8/1/06), Rhode Island (7/1/06), and Vermont (7/1/06), relative to can volume and tax rates, we found that combined the tax revenue for these three states increased 33.0% over last year during the August through October time period, Bishop said.
This analysis provides evidence that a weight-based type of tax in MST benefits both the industry and the state government.
Bishop said he became more interested in the tax issue after completing a retailer survey in August 2006 when he discovered a broad retail belief that state excise taxes negatively impact the potential for stronger profitability in MST. We learned that 73% of the retailers surveyed either agreed or strongly agreed that state excise taxes are negatively impacting their ability to grow MST profits year-over-year, he said.
He added that 69% of the retailers surveyed agreed or strongly agreed that most state excise taxes place an unfair burden on the premium products. When you get these types of results and then look at the taxing environment across the United States, you begin to wonder if there's a more effective type of tax. That's why we looked so closely at Ad Valorem and weight-based tax methods, concluded Bishop.
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