Budget Smoke & Taxes

Largest federal tobacco tax hike in history will impact retailers, jobs, low-income Americans

WASHINGTON -- Among his remarks unveiling his 2014 federal budget on Wednesday, President Barack Obama said, "To help workers earn the skills they need to fill [new] jobs, we'll work with states to make high-quality preschool available to every child in America. And we're going to pay for it by raising taxes on tobacco products that harm our young people. It's the right thing to do."

(Watch the embedded video or read the transcript.)

The proposal unveiled by the President increases the federal cigarette tax by 94 cents, nearly doubling the current tax from $1.01 per pack to $1.95 per pack, increases taxes on other tobacco products such as cigars, pipe tobacco and smokeless tobacco about the same proportion and indexes the taxes for inflation after 2014.

President Obama's proposal to impose the largest increase in the federal cigarette tax in the history of the country to fund preschool programs is unfair and ironic, the National Association of Tobacco Outlets (NATO) said in a response to the President's budget.

"For the President to target a minority of adult Americans with this massive tax increase to pay for the extension of preschool programs nationwide is unfair and ironic," said Tom Briant, executive director of NATO. "With the Centers for Disease Control reporting that 29% of all smokers have incomes below the poverty level, it is ironic that the President's proposal would seek to nearly double cigarette and tobacco taxes that fall more heavily on lower income Americans to fund expanded access to pre-kindergarten programs for all four-year-old children from families with low to moderate incomes."

He added, "With cigarette sales declining year to year, the stability of this funding source is unreliable and therefore will likely not produce the $78 billion dollars the President needs to fund the preschool education program over the next decade. If preschool education is important to the President, a better, more stable source of funding should be identified because the country can no longer depend on tobacco taxes to solve the country's problems."

Four years ago in 2009, President Obama signed into law what was then the single-largest increase in the federal cigarette and tobacco tax rates in the history of America. At that time, the federal cigarette tax was increased by 62 cents per pack from 39 cents to $1.01 per pack. According to a 2012 Federal Trade Commission (FTC) report on cigarette sales in 2009 and 2010, cigarette sales declined 10% nationwide in 2009, the year the federal tax increase went into effect, followed by another 3% decrease in cigarette sales in 2010. Based on the historical cigarette sales decline in 2009 and 2010, the new higher tax increase on cigarettes could result in even larger declines in cigarette sales.

These proposed increases in the cigarette and tobacco tax rates will, if passed into law, seriously impact retailers that sell tobacco products, said Briant.

"For specialty tobacco stores that sell primarily tobacco and tobacco-related products, a sales decline greater than what occurred in 2009 to 2010 would be destructive to their businesses and result in store closures and employees losing their jobs. For convenience stores that rely on 35 to 40 percent of their in-store sales from tobacco products, these higher taxes would also spell sales losses and job curtailment," Briant said.

NATO is the National Association of Tobacco Outlets, a national retail trade association that focuses exclusively on local, state and federal tobacco legislative issues and leads the fight for all tobacco interests in the United States.