Budget's Tobacco Tax Boost Brings Out Industry Brickbats

Proposal's critics say low-, middle-income Americans will bear brunt of increase

Greg Lindenberg, Editor, CSP

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WINSTON-SALEM, N.C. -- President Barack Obama's budget plan would increase taxes by $1 trillion over the next decade, reported the Associated Press, including a new tax on cigarettes and familiar proposals to increases taxes on the wealthy and some corporations.

Obama's proposal would increase the federal tax on cigarettes from $1.01 per pack to $1.95. The new cigarette tax would raise an estimated $78 billion over the next decade to pay for pre-school programs for children.

"The idea of increasing taxes on low- to middle-income Americans at this time is ludicrous," Bryan D. Hatchell, a spokesperson for Reynolds American Inc., Winston-Salem, N.C., told CSP Daily News. "As middle-income Americans struggle to make ends meet in a very slow economic recovery period, this is not the time to hit them with higher taxes."

The Obama administration raised cigarette and other tobacco taxes by 158% just three years ago, said Hatchell. Those taxes went to pay for children's health care. The newly proposed tax increases are earmarked for prekindergarten programs.

"It is fiscally irresponsible to peg funding for programs that are likely to get more expensive every year to a product category that declines in sales every year," he said.

The White House has supported efforts to reduce smoking rates. You simply can't have it both ways--if you're successful in driving down smoking, you're dooming programs to nearly immediate budget shortfalls. This means that states will be left holding the bag for funding or even more new taxes will have to be imposed in the future."

Only about 20% of Americans use tobacco products, Hatchell said. "Why should they be asked to pay for programs that help millions of others? Broadly used programs should have broad and stable-to-growing funding mechanisms."

Citing the Centers for Disease Control & Prevention (CDC), Hatchell said the estimated median adult smoker household income in 2011 was $27,700, compared to $45,761 for nonsmokers.

About 47% of smokers have a median household income of less than $25,000. Only 14.6% of smokers have an income of $75,000 or more.

"Cigarette tax hikes clearly will hit lower-income Americans the hardest," he said.

Bonnie Herzog, managing director of beverage, tobacco and consumer research for Wells Fargo Securities LLC, New York, agreed.

"We believe the proposal has a low chance of passing in its current form given House Republicans, who tend to oppose tax increases, are more prominent in Congress now versus in 2009 when the last federal excise tax (FET) increase was passed, and this tax would unfavorably impact some of the more vulnerable income populations (i.e., moderate-to-low income households)," she wrote a research note.

However, if the new tax increase does occur, she said, cigarette companies could experience a rise in operating profit similar to that seen in 2009 when the State Children's Health Insurance Program Reauthorization Act (SCHIP) increased the federal tax rate on cigarettes by 61.66 cents per pack (from 39 cents to $1.0066 per pack) and on moist snuff, the most common form of smokeless tobacco, by 92.5 cents per pound (from 58.5 cents to $1.51 per pound). It also increased taxes on other forms of smokeless tobacco.

That tax increase, to $1.01 per pack from 39 cents pack went into effect on April 1, 2009. Richmond, Va.-based Philip Morris and Greensboro, N.C.-based Lorillard took cigarette list price increases of 71 cents per pack and Reynolds American took increases of 44 cents per pack for Camel and 41 cents per pack for Pall Mall.

"These list price increases resulted in accelerated cigarette operating profit growth in 2009 with an even greater positive impact in 2010," she said.

A tax increase also "could spur greater interest and trial in e-cigarettes," Herzog said. "A federal tax hike on traditional cigs would very likely be followed by list prices increases from the manufacturers in excess of the federal increase as well a likely uptick in state tax increases. These could in aggregate raise cigarette prices upwards of $2.00 [per] pack. Since e-cigarettes are not currently federally taxed, this would widen the price gap of e-cigs versus traditional cigs."

Meanwhile, through its www.TransformTobacco.com website and with "tax alerts" sent to customers, Reynolds American has rolled out a communications effort to suggest ways that retailers and others can contact their member of Congress to express their opinion.

It has also established a toll-free number, (866) 629-5268, that they can use to contact members of Congress members.

"These tools are provided to assist retailers in making their opinions known," said Reynolds American.