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August,
2006


Capping Cigar Taxes

What began as a lonely long shot in the late 1990s has now been successfully repeated three times: rolling back an extremely high cigar excise tax rate and replacing it with a moderate flat tax per stick. The proven model could now be set to restore in-state cigar sales nationwide.

By Dale Scott

"I came to RTDA 2006 more excited and optimistic than ever, with the news I had just received," explained Paul Joyal of Joyal's Liquors, Warwick, Rhode Island. And he had reason to be: He and three other Rhode Island tobacconists had just accomplished what conventional thinking would say is impossible. Conventional thinking, usually done by those on the wide path to destruction, believes "raising taxes increases government revenues." The four showed Rhode Island how to significantly increase revenues, at lower enforcement costs, by reducing taxes on premium cigars. It is now the third state to tread the narrow path to fiscal salvation.

"The states are all broke and scrambling for money," contends Joyal. "Tobacco is bull's-eyed for unreasonable taxation that accompanies America's prohibitionist society. Now, the truth is out ... we won't be the last. I predict an avalanche of states will follow."

Like many states, Rhode Island had imposed on retailers a burdensome tax (40%) on the wholesale value of all tobacco products shipped into the state. But, revenues fell, lost by smokers ordering out of state. The four convinced legislators they could recapture those revenues by replacing the punitive 40% tax with a 50-cent tax on premium cigars worth more than $1.25 retail.

Some history: Oregon was first to substitute the 30% wholesale tax with a 50 tax, not to exceed 50 cents (capped), on cigars worth more than 77 cents manufacturer's suggested retail price (MSRP). Then Washington followed suit. In Rhode Island's example, a $5 MSRP cigar previously carried a tax of $2 (30%), increasing its MSRP to $7. The 50 cent cap cut the price to $5.50, a $1.50 savings. A 25-cigar box dropped from $175 pre-tax to $137.50. "Smokers also didn't have to pay shipping, wait for their order, or solve problems long distance," says Joyal. "Now, we're on a more level playing field with the big mail-order houses in low- and no-tax states. Based on Oregon's results, we believed most smokers preferred the ambience of a tobacconist, and would pay a fair tax."

Joyal's fellow Rhode Island combatants are tobacconists Donna Polofsky and her daughter-in-law Jana Mooney, partners in Humidor Cigar World (four stores statewide); and Eric Chaika, proprietor of Red Carpet Smoke Shop (Providence). Polofsky adds, "We have yet to reduce prices on our cigars, because the state wouldn't roll back our previously-paid taxes. But, we experienced an immediate upswing in box sales, even at the high-tax prices!"

A Blueprint in the Making
Polofsky's friend, Jan Rowe, owner of Cascade Cigar & Tobacco, in Portland, Oregon, was the nation's first to supplant the wholesale tax with a 50 cent cap per cigar. Rowe's battle must have been lonely, taking three legislative sessions and untold hours dealing with the techno-bureaucratic juggernaut. Compound that with the fact that Rowe had no track record to prove the idea would actually increase revenues. "The first year," Rowe reports, "several retailers were involved. The second year, the numbers dropped as things got tougher. The third year, I was alone, with the exception of Dan McIntyre, an Oregon tax activist, who helped me greatly. He knew the short cuts ... who to talk to for example." She recalls testimony by Altadis, holding a box of their cigars in one hand, and quoting from mail-order price lists in the other, graphically showing why Oregon retailers and the state were suffering. She pointed out the sales, income, inventory, and other collateral taxes that were also evaporating by smokers buying in other states. She convinced legislators that the benefits would be immediate, in contrast to the blue-sky promise of the Master Settlement Agreement: research into the MSA showed Oregon's enforcement expenditures of roughly $35 million had garnered only $10 million in tax delinquencies. Ultimately, she prevailed in 2004. The results? "I saw a healthy increase in sales in six months, and it continues unabated," she reports. "Box sales are strong, not just single-stick samples, like before."

Rowe's research uncovered www.tobacco.org which has a timeline of tobacco-related historical events. It shows that, starting before colonial times, the U.S. has experienced tobacco prohibitions and high taxation every hundred years, and each period has lasted about 35 years. "So, I predict we're about halfway through this one," she states.

Armed with Rowe's research, arguments, and official tax revenue records, Joyal, Polofsky, Mooney, and Chaika began a fight that lasted two years. Like Rowe, they found little support or involvement from fellow tobacconists. However, they remained buoyed by the previous successes, and tireless and priceless assistance by Rowe. Legislators were new to the idea of reducing taxes to increase revenue, and more than one politician lacked the courage to sound "pro-tobacco." In the last innings, the American Cancer Society (ACS) leveled both barrels at them. By now, though, the politicians were convinced of the cap's efficacy. "If you'll pay for the shortfall in revenues we'll suffer by abandoning the cap, we [won't] implement it," the politicians told the ACS, who skulked off into the night. Polofsky notes the ACS used emotionalism and questionable "statistics." One example was ACS's claim of rampant selling of tobacco products to children, thus the need for enforcement. The enforcement records, however, showed only 17 violations in the previous year, 16 by one family-owned chain. "We were able to show compliance by tobacco retailers was almost unanimous, in opposition to ACS's 'For the Children' skewed numbers."

Polofsky's historical recollection proved valuable, and something the legislators lacked. "We've been in business 41 years," she explains. "In the '60s, Rhode Island levied a 25% tax on cigars. My husband responded by opening a store across the line in Massachusetts, which was then a no-tax state. In a short time, we became the #1 tobacco retailer in the entire Northeast. The tax lasted only three years. I showed legislators photos of customers lined up two-to-three blocks to buy our tobacco products. That impressed the reality of out-of-state buying upon them."

Joyal can also attest to the success of the retailer's arguments. "I received a 30-minute phone call from a woman in the Massachusetts taxing authority recently," Joyal recounts. "She quizzed me in depth about the workings of our tax-cap program, and the underlying facts supporting the legislation's success. It was obvious by her tone, Massachusetts is worried about its tobacco tax revenues. New Hampshire, and now Rhode Island, are neighboring states to Massachusetts, and both have much lower tobacco taxes and cigar prices. They know people can take a leisurely drive on a nice weekend, and save maybe hundreds of dollars on cigars."

Idaho may well be next, as their legislature only defeated the cap by one vote last year, and you can bet it'll be back. Michigan is heating up, and San Diego-based tobacconist Charlie Hennegan of Liberty Tobacco is beginning the fight there. Joyal predicts an avalanche of similar tax caps across the nation, as states see tax revenues in tax-cap states bagging their customers.

Success Lobbying Strategies
Eric Chaika, a third-generation tobacconist, is quietly logical and deliberate in his speech, which is the proper demeanor for addressing legislators. All parties said emotional arguments only alienate legislators. First, he points out you want to direct your efforts at legislators; taxing agencies only enforce the will of the lawmakers. Polofsky further suggested directing efforts at the speakers of the legislative bodies. The Rhode Island cap was tacked on to the General Fund, without ever becoming a bill, when the speakers - once convinced - pushed it through by agreement.

Chaika emphasized the importance of convincing the legislators the cap will benefit the state, not just the retailers. He suggests, however, making the problem more real by "putting a face on it" and explaining how it is driving you and other retailers out of business, hurting all of you and your families and your communities. Explain to them how high taxes encourage disrespect for government and black -market and counterfeit cigars, which spawns criminal activity, as did Prohibition.

The Cigar Association of America (CAA) provided figures that contrasted the increasing cigar consumption nationwide with declining cigar sales in Rhode Island - a powerful argument for loss to mail-order retailers. Cap advocates will need to make the campaign personal, meeting legislators face-to-face. Those I spoke to bought many a breakfast for legislators, a good time for lobbying. Sometimes, a sympathetic legislator may sponsor an opposing bill to the existing tax. Communicate with legislators via phone, not E-mail (secretaries don't want their boss disturbed, and delete emails). One legislator also told the group, "We know 35 phone calls on any issue is significant. For every one [constituent] who calls, there are a thousand [others] who feel the same, but don't call." They suggested enlisting the phone-call support of customers, urging them at the same time to be rational and respectful.

Rowe says, "It feels great to see sales and profits up substantially." The Rhode Island participants expect to see the same soon. And, says Joyal, "All those uninvolved tobacconists are sharing the benefits of our efforts. But, I'd do it again." Lastly, we are deeply indebted to Jan Rowe, a lone woman who never quit, and who may be the industry's most significant person in recent years.


SMOKESHOP - August, 2006