Special Report: Tobacco on Fire Pt. 3

Federal tax hike just tip of iceberg as many states consider increases of their own

Mitch Morrison, Vice President of Retailer Relations

[Editor's Note: This is the third of a four-part CSP Daily News series on how the industry is reacting to the federal excise tax on tobacco that begins in April.] MADISON, Wis. -- Thank goodness Andy Bowman is used to it. He's talking about SCHIP and sticker shock and his 35 Stop-N-Go stores in the Greater Madison market. "In a way," he said, "we had a chance to get used to SCHIP before everyone else. We got hit last year pretty bad."

The Wisconsin Legislature last year passed one of the steepest hikes in the country, approving a $1-per-pack cigarette tax [image-nocss] increase, making Wisconsin's cigarette tax at the time the 15th highest in the nation at $1.77.

Overnight, smokers were forced to fork over between $1 and $1.25 for their favorite product. And retailers were forced to prepare for a sharp decline in their strongest inside category.

"We completely changed our whole approach. We had to," Bowman, the chain's vice president, told CSP Daily News. "And now we do better than our competition. Let me restate that, we do a lot better than our competition."

Bowman understandably declined to share the secrets of Stop-N-Go's tobacco success other than to say the company has greatly improved efficiencies, from ordering to plan-o-gramming. But his lesson is timely as more than 150,000 convenience retailers and tobacco outlets prepare for the largest across-the-board tobacco taxation in history.

Effective April 1, the federal excise tax (FET) increase kicks in on virtually all tobacco segments to finance expansion of the State Children's Health Insurance Program (SCHIP). Among the increases: a pack of cigarettes jumps from 39 cents to more than $1, a pack of little cigars soars from 4 cents to more than $1; and in the biggest hit, the levy on roll-your-own tobacco skyrockets from $1 a pound to nearly $25.

What is generating far less attention is that nearly half the states in the country have passed or are contemplating raising their state excise tax on tobacco to finance budget shortfalls that are running in the hundreds of millions-and even billions-of dollars. And these increases are cutting across party lines.

Consider Kentucky and Mississippi, historically conservative states. Kentucky in February voted to raise the tax on cigarettes by 30 cents a pack and imposing a 6% retail sales tax on alcohol to close a $456 million budget shortfall.

Mississippi lawmakers were debating cigarette taxes too. Not on whether to raise them, but rather how much. Senators in mid-February overwhelmingly approved hiking a pack of cigarettes by 49 cents, while the state House of Representatives voted to raise the tax by 82 cents. The debate is aimed at balancing the budget.

"If you're a local retailer, you have to be worried about your state," said Robert Sears, director of trade relations at Philip Morris USA. "You're seeing the potential of a state tax on top of a federal tax."

Indeed, the economic slump, compounded by the federal tobacco increase, is raising tobacco prices by unprecedented amounts that exceed the Master Settlement Agreement a decade ago. Some states could see the price of cigarettes climb by as much as $2 a pack.

And there's not much retailers can do about it.

"It's very mind boggling to me that as much taxes as the convenience-store industry produces on federal, state and local [levels], that someone would realize the impact that it can have on the budgets across the board," said Danny Blackburn, vice president of Marsh Petroleum, operator of Greeneville, Tenn.-based Kwik Shop.

As it is, Blackburn expects a significant backlash from the SCHIP tax hike. "We could see as much as a 15% decrease in sales," he said. "Once everything levels out, we may get some of that back over time. There is no question about it that the cigarette category will feel the biggest impact. If by chance anyone is considering a roll-your-own program, you can forget that idea."

While he turns his attention to better inventory control and seeks other avenues for growth, Blackburn also has a message for state and federal governments. "They need to run the government just like everyone in this industry does: When money gets tight buckle your boot straps and get in the trenches."

States Eying Cigarette Tax Hikes

Two states already passed state cigarette taxes this year: Kentucky raised its tax 30 cents per pack and Arkansas by 56 cents per pack. More than 20 other states are considering increases to offset budget shortfalls.
Alabama: 32.5 cents California: $2.10 Connecticut: 50 cents Georgia: $1 Hawaii: 3 bills pending (amount TBD) Illinois: $1 Kansas: 95 cents Maryland: 75 cents Missouri: 16 cents Mississippi: 14 bills pending (ranging from 17 cents to $1) New Hampshire: $1 New Mexico: $1 Oregon: Several bills pending (ranging from 3 to 60 cents) Rhode Island: $1 South Carolina: Several bills pending (ranging from 25 to 93 cents) Tennessee: 18 cents Utah: $1 Virginia: 30 cents Washington: 75 cents Wisconsin: 75 cents West Virginia: 80 cents For more about SCHIP and its impact on c-stores, see the April issue of CSP magazine.

Mitch Morrison Winsight CSP By Mitch Morrison, Vice President of Retailer Relations
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