The Cutting Edge

In an unprecedented move, states mull cutting cigarette excise taxes to potentially bring in more revenue.

By
Linda Abu-Shalback Zid, Senior Editor

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In an unprecedented move, states mull cutting cigarette excise taxes to potentially bring in more revenue 

It seems like a misprint: States considering lowering cigarette taxes. But it’s not.

This year, three East Coast states—New Jersey, New Hampshire and Rhode Island—were considering proposals to actually slash cigarette taxes. Although New Hampshire’s bill for a 10-cent reduction passed the House, it was defeated in the Senate by a 13-11 vote.

At press time, a $1 reduction in Rhode Island and a 30-cent decrease in New Jersey also were still being discussed. Although it was unclear if the votes would even happen before legislative breaks, these measures represent a new way of looking at state cigarette excise taxes.

And OK, so the dime decrease in New Hampshire might not have sounded like much. But John Dumais, president and CEO of the New Hampshire Grocers Association (NHGA), says the reduction could mean $1.7 million more profit for his state’s convenience stores, and $12.8 million more in cigarette excise and other taxes (such as business-profit and business-enterprise taxes) for the Granite State. And that is the bigger story. States starving for cash are not automatically dipping into their clichéd tax bags to close the gaps. Some, pondering whether they’ve taxed to their own detriment, are considering reductions to spur greater consumer spending and, thus, more feed for their coffers.

In New Hampshire, a state with no sales tax, this consideration bears out. A study conducted by Southern New Hampshire University on behalf of the NHGA found that subsequent tourism from price-sensitive customers could mean increased spending on hotel rooms, restaurant dining, alcohol beverages, lottery tickets and gasoline from neighboring Massachusetts, Vermont and Maine.

So why 10 cents in the state where the $1.78-per-pack tax is already lower than its neighbors? Dumais says people have wondered, “If 10 cents is going to do a lot of good, wouldn’t a 20- or 25-cent decrease be a lot better?”

His answer to that is yes. “But because there’s still a lot of questions from a lot of people on whether this can actually do what it says it can do, we wanted to walk before we run,” he says. “If we can prove that reducing the tax equals enough revenue, then maybe we can come back later and ask for additional cuts later on.”

The other Northeastern states may be facing a steeper climb. Diana O’Donoghue, executive director of the New England Convenience Store Association, encourages retailers to participate in grass-roots taxation efforts. “That participation can take many forms, whether it be by a call, email, letter, fax or visit with a state legislator or a federal legislator, or by testifying at legislative or regulatory public hearings,” she says.

 Retailers also can take a cue from Kevin Doody, who works as a consultant to Houston-based Timewise Food Stores. Manufacturers, he says, often provide form letters to send to representatives. But his company opted for a more personal touch during a recent tax-increase proposal, sending 17 different letters to each representative.

“His letter is going to be unique to him, and they’re all going to be a bit different because they’re heartfelt,” Doody says. “So we’re not just responding to something attorneys recommended. We’re writing it because we mean it.” Other industry insiders also offered cigarette retailers advice close to their own hearts.

Thomas Briant of the National Association of Tobacco Outlets says retailers should belong to trade associations that can keep them up to date, as well as act on tobacco legislative issues. “We involve our retailers and their customers in grass-roots advocacy to oppose any new cigarette and tobacco tax increases, and we also educate legislators about other states, which have experienced revenue shortfalls or revenue declines after raising cigarette and tobacco taxes,” he says.

Bruce Gates of Altria Client Services says, “We recommend that retailers get engaged with their legislators and governors— and stay engaged.” He also recommends the company’s www.tobaccoissues.com, where retailers can “find information specific to the states in which they operate, along with sample letters, advocacy materials and tips on communicating with legislators and other elected officials.”

John Singleton of R.J. Reynolds says retailers should keep checking www.nocigtax.com and stay active on tax issues. “That has so much more impact than anything that we can say from our corporate headquarters in North Carolina as a large corporation with a vested interest, but not the kind of local interest and potentially local impact that you have on tax revenue and employment—two things that are very much at the forefront of politicians’ minds these days.”

New Jersey, where a previous state cigarette excise tax increase resulted in a loss of revenue, was considering a 30-cent reduction, from $2.70 to $2.40—although that proposal seemed stalled. And Rhode Island, which has the second-highest state cigarette excise tax at $3.46, was considering a $1-per-pack decrease.

However, Danny McGoldrick, vice president of research for the Campaign for Tobacco-Free Kids, actually points to Rhode Island as a case study for raising taxes, not cutting them. Between 2001 and 2009, the state increased cigarette taxes five times and saw a 46% decline in youth smoking and a 37% decline in adult smoking—both substantially more than national declines, he says.

The state also saw more than a $75-million increase in cigarette tax revenues in 2009 than in 2001. “So revenues going up $75 million, smoking rates down dramatically to where they’re way lower than the national average, and we want to change this?”

Trend in the Making?

While cigarette tax increases have meant increased state revenue in most states, many say it is at the expense of retailers—and that the increased revenue often doesn’t even reach projections.

Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO), explains the recent phenomenon of considering tax reductions: “States are now starting to understand that there’s a point of diminishing returns in their attempts to continually increase cigarette and tobacco tax rates. “Legislatures have been going back to the well numerous times, and are simply finding that additional increases in the tobacco tax rates generally do not raise the amount of revenue estimated to be collected, or collect less than the tax revenue under the current tax rates.”

If reducing cigarette taxes becomes the new trend, it could mean rethinking anti-tax tobacco websites such as R.J. Reynolds Tobacco Co.’s www.nocigtax.com. The 3-year-old site provides information about the negative effects of increasing state cigarette excise taxes. Company spokesman John Singleton says the company may have to look at the site’s language, but adds, “It’s nice to be able to push for something, as opposed to just saying we don’t think this is a good idea.”

Singleton attributes the reduced-tax mentality to a “seismic change in political thinking in the country” since the November elections, with many expectations of smaller government and lower taxes from constituents. “I think there might be something of a ripple effect from November elections that is making some legislators think, ‘How do I live up to this commitment that we were going to try to shake things up and look at things differently?’ ”

That several states are even debating whether to scale back cigarette taxes is remarkable. But is it a trend, or an idea borne out of a languishing economy riding especially hard on cigarettes’ core users, the working class?

“They’re all realizing that raising taxes doesn’t necessarily mean you’re going to make more money, especially if the state next to you has much lower taxes,” says UBS tobacco analyst Nik Modi. “They’re all kind of just figuring out that just because you’re raising taxes doesn’t mean you’re making more money.

“If one of these states passes a law and it essentially drives more revenue,” Modi says, “you might see other states follow.”

The major cigarette makers predictably oppose tax increases. With that, they’re at least pleased to see taxation’s weather vane starting to blow in the other direction. “We’re hoping that the effort ultimately leads to a thoughtful discussion about a rational system of taxation on a legal product,” says Bruce Gates, senior vice president for Altria Client Services. “Our view is that current tax rates on our products are too high. They are overly burdensome on our consumers, and they have led to problems like contraband cigarette trafficking.”

Gates continues, “We support reasonable taxation of our products, but until recently, the trend appeared to be heading in a very different direction, with proposals for tax increases of as much as $1 or $2 per pack.”

Beyond Borders

Could the tax trend be downshifting? Too soon to know, says Gates: “But I think some state legislators are responding to the overall political and economic environment. And they’re looking at the states around them and seeing their residents crossing borders to make purchases.”

Just as with any other convenience store competing down the street, price can play a role in consumer decisions when down the street also happens to be in a different state. Interestingly, New Hampshire’s tax already is less than surrounding states, so its challenge was unique. But unlike other parts of the country, the New England states are small and clustered, and the borders of New Hampshire, Maine and Massachusetts easily connect.

“For a number of years, every time they’ve increased the tax, the retailers have lost substantial sales,” says Dumais of the NHGA. “And those sales traditionally have come from across the border.” Historically, about 40% of total customers came from out of state. “And as the price of tobacco went up, we started seeing an erosion of those customers.”

Mark Keenan, who owns Discount Beverages Plus Cigarettes in North Conway, N.H. (near the Maine border), is one of the retailers feeling that. Keenan says he has lost about 50% of his carton business over the past four years of increases and has had to lay off three employees—not to mention losing the customer shopping lists that came with those carton sales.

“There’s consequences to the actions of not having the tax advantage,” he says. “And to say that we’d add more employees— it’s too soon to say, but it certainly wouldn’t hurt.

“As an industry, if you give us the advantage, we can produce.”

The New England Convenience Store Association (NECSA) includes New Hampshire and Rhode Island, as well as the bordering states: Connecticut, Maine, Massachusetts and Vermont.

But when asked if she has mixed feelings about possible cigarette tax reductions, NECSA executive director Diana O’Donoghue is unequivocal in her response: “NECSA’s members support lower taxes on the product sold in their stores to encourage greater sales. Members in states that are not considering these reductions can see the benefit of a neighboring state reducing a tax. When one state chooses to raise or lower a tax, it raises the awareness of neighboring states who may choose to take a similar action.”

Briant of NATO also is hopeful for a bigger-picture outlook: “If any of these tax reductions were to be enacted, perhaps other states will see the importance of reducing their own cigarette and tobacco tax rates to avoid continued revenue loss, when residents are forced to look for alternative sources of tobacco products at cheaper prices.”  

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