Tobacco Tax Turmoil (Part 2)

Roll-your-own to take tremendous hit as experts project sales declines, job losses

Steve Holtz, Editor in Chief, CSP Daily News

OAK BROOK, Ill. -- Cigarette sales declines of up to 7%, 117,000 jobs on the line and the possible end of the roll-your-own category: These are some of the dire predictions coming on the heels of the Senate's approval of its version of a health insurance program that will raise tobacco taxes by dramatic percentages.

"Clearly the majority in Congress and even the new president don't seem to care about the severe economic impact that these tax increases are going to have on retailers and wholesalers and the entire industry for that matter," Tom Briant, executive director of [image-nocss] the National Association of Tobacco Outlets (NATO), told CSP Daily News. "In this economy, the message we tried to convey to Congress was that this single-largest tax increase on one product in the history of the United States will result in as many as 117,000 jobs lost in the retail, wholesale and manufacturing sectors."

Briant said he and representatives of other associations opposing the tax hike looked at how many people are employed by the industry--about 2 million--and then calculated what the potential sales declines would mean in terms of job losses. "But watching and listening to the debate in Congress on C-SPAN, I don't think a single senator or congressman brought up the impact on the industry," he said.

The tax hike will fund an expansion of the State Children's Health Insurance Program (SCHIP). According to a report from Fitch Ratings, the additional 61-cent tax on a pack of cigarettes will produce a volume decline of approximately 3.5% to 7%.

"While tobacco products are relatively price inelastic, they are not perfectly inelastic," said senior director Wesley E. Moultrie II. "As a result, near-term revenue and operating income growth may be negatively impacted, leading to weaker credit measures."

Fitch further noted, with cigarette volumes decreasing as a result of the increase in the federal cigarette excise tax, state cigarette excise tax revenues will consequently fall. A number of states have dedicated programs funded by their own cigarette excise taxes, meaning states will have to cut their dedicated programs or increase their state cigarette excise taxes. In addition states' budgets are facing record shortfalls; some 45 states are projecting budget deficits for fiscal year 2009 and/or 2010. So-called "sin taxes," taxes on tobacco and alcohol, will be popular revenue sources for state governments looking to somewhat offset revenue shortfalls.

But perhaps the category hardest hit by the bill, which is expected to be signed by President Obama sooner rather than later, is roll-your-own (RYO) tobacco, which will see a tax increase of nearly 2,200%.

"The way I'm looking at it, roll-your-own is going to be out of business," said Fred Hoyt, president of the 18-store Smoke N Go chain based in Abbeville, La. "That was a viable alternative [to cigarettes] where we're sitting right now, but it's not going to be price advantageous [anymore]."

Many retailers agree. In a Kraft/CSP Daily News Poll yesterday, nearly 60% of the 150 respondents said they expect the tax increase will "kill" RYO tobacco sales.

Briant, however, is not yet ready to write a eulogy for RYO. "I think [RYO manufacturers] are going to try and adapt," he said. "The pound bags of roll-your-own tobacco are going to be a thing of the past simply because [consumers] are not going to put out $50 or $60 for a pound bag of RYO tobacco. They're going to go to the smaller bags and quantities, maybe one-fourth of a pound, to still make it attractive.

"If you do the math and you buy a quarter-pound of RYO tobacco, plus your tubes and your machine, it's still about 50% less than the cost of fully manufactured cigarettes. So I think RYO will survive. Will it be different? Absolutely. But sales will drop."

And while the April 1 date for the tax hike will mark a significant change for tobacco consumers, Aug. 1 is the date retailers and wholesalers will need to mark on their calendars.

"The retailers and wholesalers are going to be hit tremendously come Aug. 1 with the floor-stock tax," said Hoyt.

This tax requires retailers and wholesalers to pay the increased tax on product they had in stock before April 1.

"The floor-stock tax is going to hurt," Briant said. "We estimate for the average tobacco store, about $7,000 will be the floor-stock tax. They have four months to pay that. It's due August 1, so retailers are going to have to be very careful and as they sell the inventory after April 1, make sure they set aside the extra tax they're collecting in order to be able to pay it by August 1. Each retailer does receive a $500 credit toward the floor-stock tax, not per store, but per retailer.... Five hundred dollars doesn't really do much."

So is there a bright side top these new taxes? Depends on your point of view, but for manufacturers of other tobacco products-most of which also will see tax increases-this may push more consumers to sample or move to products such as snus and moist smokeless tobacco.

"I think people are still going to be looking for the OTP category to increase in sales because [consumers] are going to be looking for alternatives, especially with all of the bans on local smoking," said Hoyt. "That's already in place, so it will continue to increase."Click hereto read Part 1.

Steve Holtz, CSP/Winsight By Steve Holtz, Editor in Chief, CSP Daily News
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