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December,
2007

With Huge Cigarette Tax Hikes,
Little-Taxed Cigars Increasingly Flagged as “Glaring Omissions”

There was a time when a 5¢ rise in a state’s cigarette excise tax was big news. These days, states keep a straight face doubling or tripling their current tax in one shot, and a $1.00 hike is fairly common. Take Texas, which hoisted its 41¢ per-pack cigarette tax on Jan. 1, 2007 to $1.41 and then sat back and watched as the money poured in - $244 million more than it anticipated for the fiscal year that ended September 1, in fact - or a whopping $1.248 billion. None of the cigarette tax revenue is earmarked for health care or anti-smoking programs, but instead for school property tax cuts. Texas lawmakers this year defeated an effort to require 5 percent of the new tax money to be used for anti-smoking programs.

It turns out the initial drop in consumption was less than predicted, although officials expect the decline to pick up pace in the coming months as consumers continue to adjust to buying habits to the prices. Even so, anti-smoking groups are still pleased, boasting that 261 million fewer packs were sold since the increase went into effect. At least legally. The Campaign for Tobacco Free Kids had projected that the cigarette tax increase would result in 339 million fewer packs of cigarettes sold in Texas, a projection that was off by about 78 million packs.

Texas lawmakers didn’t raise taxes on cigars - no doubt in large part due to retailer and industry lobbying - but they did approve a modest increase on other tobacco products, including pipe and chewing tobacco. Clearly, states recognize that the potentially huge revenue windfalls don’t apply equally to the various classes of tobacco; for starters, the relatively small size of any one of these market niches pails in comparison to cigarettes. None-the-less, similar situations in other states has put cigars and OTP under scrutiny, and the “hurting the little guy” argument is clearly.

Consider the following excerpt from a Baltimore Sun editorial in December:

"A pack of five apple-flavored Black & Mild little cigars costs slightly less than a pack of cigarettes. Next month, it will cost a lot less. That's because while Gov. Martin O'Malley and the Maryland General Assembly chose to raise the tax on a pack of cigarettes by one dollar during this fall's special session, they neglected to raise taxes for any other form of tobacco."

It's a glaring omission that needs to be corrected as soon as possible. Cigars, pipe tobacco, snuff and the like raise many of the same health concerns that cigarettes do. A little cigar, for instance, is inhaled just like a cigarette (an unfiltered one, at that), and because it contains five to 17 times as much tobacco, it can deliver far more nicotine. Yet little cigars and other forms of non-cigarette tobacco sold in Maryland face a 15 percent wholesale tax, a far cry from the $2 per pack tax that cigarettes fall under beginning Jan. 1. Anti-smoking advocates say the other tobacco tax would have to be at least five times greater to be equivalent.

Why wasn't the tax raised? Lawmakers were likely sympathetic to mom-and-pop tobacconists who would be hit hard - and because it doesn't raise nearly as much money for the state as the tax on cigarettes.

But it's also an incredibly shortsighted decision. If the point of raising a sin tax is to discourage tobacco's use, then tobacco vendors are bound to be hurt. Otherwise, the state is merely encouraging nicotine addicts to switch from cigarettes to something else…

Expect pressure to tax OTP at rates comparable to cigarettes to grow, and the need for the industry stakeholders - particularly IPCPR members - to respond.

E. Edward Hoyt III