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October,
2007

Expanded SCHIP Funding: Pass or Fail in 2007,
Big Threats and Challenges Remain for Industry

Now that tobacco has been thrust back into the national spotlight - pitted precariously against children’s healthcare - the industry is poised for protracted challenges ahead. President Bush’s veto of Congress’s compromise SCHIP bill - and the possible but relatively unlikely chances of a successful Congressional override - now sets the stage for propelling the issue straight into the 2008 Presidential campaign, with the cigar industry caught haplessly in the crossfire. Even if a tobacco tax disaster is averted for now, an even bigger fight looms ahead, as factions are lining up on either side of the healthcare debate. Tobacco will take its standard place as the evil entity worthy of being sacrificed for the sake of [fill in the blank here]. You get the picture.

But can efforts to change public perception that small retail shops, the traditional family businesses creating hand-made premium cigars, and struggling overseas economies are a world apart from Big Tobacco?

First, a recap of what the proposed bill would mean to a cigar shop, courtesy of Rocky Patel Cigar Co.;

  • A 1,952% cigar tax increase would effectively put you out of business;

  • The bill being proposed would raise your retail prices by 70%;

  • No other product has ever been subject to such an exorbitant tax. The tax on a can of beer is only a nickel; the tax on a liter of a $150 bottle of wine is only 30¢. A $1.00 tax on a $4.50 cigar is outrageous.
Clearly, what’s bad for retailing is equally bad for manufacturing, and the industry response to this threat has been nothing short of astounding, if not always in agreement. Smaller premium manufacturers started their own lobbying efforts, including attempts to have hand-made cigars excluded entirely from the bill. Traditional lobbying efforts by the Cigar Association of America, which represents the industry’s biggest manufacturers and thus all cigars (the vast majority of cigar sales are comprised of mass market and machine-made varieties) continues apace, while retail trade associations including IPCPR (formerly the RTDA) and NATO (National Association of Tobacco Outlets) have mobilized their retail members to reach out in turn their own customers. Major catalog retailers have enlisted their customers.

By the time you read this, the Congressional override attempt will have already happened, and with any luck all of the months of scrambling will have kept this beast at bay, in which case it will be time to plan for the next round of assaults, because the issue isn’t won’t be going away. If the bill passes, there seem to be few ideas out there as to how to mitigate the damage: will the effects be as dire as predicted? Will larger retailers with greater resources simply be more likely to survive in the long run compared to smaller ones serving smaller markets? If a retailer shakeout ensues, will there be a shakeout among manufacturers? Could a black market in cigars erupt…even for traditionally pricey ones banned by the U.S. embargo on Cuban goods?

Our next issue will closely examine the fallout of the vote, and what lays ahead.

E. Edward Hoyt III