Taxing Situation

State tobacco tax rates remain relatively stable in soft economy.

By
Linda Abu-Shalback Zid, Senior Editor

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So far this year, 18 states have proposed tobacco-related tax increases. This has led to much talk but not much action—except on the East Coast, where two states passed increases, and one, in an unprecedented move, even passed a decrease, leaving many to speculate about cross-border activity.

In New Hampshire, Democratic Gov. John Lynch let a $10.2 billion budget, which included a 10-cent reduction in state cigarette taxes to $1.68, become law without his signature, rather than potentially cause a government shutdown by vetoing it.

According to research conducted by Southern New Hampshire University for the New Hampshire Grocers Association, a 10-cent-per-pack excise-tax reduction could mean $1.7 million more profit for the state’s convenience stores, and $12.8 million more in cigarette excise and other taxes (such as business-profit and business-enterprise taxes).

John Dumais, president and CEO of the association, says purchases that might come along with people crossing the borders of New Hampshire to buy cigarettes could include gasoline, food, beverages and even hotel rooms. “It’s primarily to help business, but it ultimately helps the state, because when those cross-border sales come to New Hampshire, they buy a lot of other products,” he says.

The state, which also bears the distinction of having no sales tax, was also already lower than neighboring Maine ($2.00) and Massachusetts ($2.51). Vermont, on the western border, increased cigarette taxes 38 cents to $2.62 on July 1. Vermont’s roll-your-own also increased to 13.1 cents per .0325 ounces, and large-cigar taxes also edged higher. (See chart on p. 156.)

In nearby Connecticut, cigarette taxes increased by 40 cents per pack (to $3.40 per pack) and the tax rate on other tobacco products increased from 27.5% to 50%. Gene Guilford, president of the Independent Connecticut Petroleum Association, expressed concern about cigarette sales potentially shifting to neighboring states. Connecticut’s border to the north, Massachusetts, has a $2.51 cigarette tax.

“Connecticut is not an island, and we can’t pretend that there isn’t going to be an issue of cross-border traffic. It hurts the whole state, but especially hurts the businesses along the border,” Guilford says. A pack of cigarettes will now cost $8.50 and up. “It’s getting to be a very expensive thing to do.”

Meanwhile, in neighboring Rhode Island, one representative already hopes to get his state on board the cigarette statetax- reduction train next year. While Democratic Rep. Bob Phillips wasn’t able to get the $1 reduction he had proposed passed this year, he says he plans to reintroduce the bill, likely with additional support.

Phillips says, “Rhode Island is at a disadvantage to all other states in that we are the smallest state, and to get to Massachusetts or Connecticut is probably 20 to 25 minutes from the most central part of our state.

“We need to have a competitive edge, which we do not at this time,” he continues. “It makes common sense that if people buy the cigarettes in Rhode Island, then it would help retailers and save jobs or create some. … It would also send a perception signal to the citizens of Rhode Island that the government is making the state more business-friendly, and hopefully attract new businesses into our state.

“I do have a couple of more reps that want to work on it next year, and we will work together in the off-season to see how we can get it passed.”

Another effort that didn’t pass this year included proposals for cigarette tax increases in Oregon of up to $2. Chris Girard, president and CEO of Beaverton, Ore.-based Plaid Pantries Inc. had provided written testimony to stave off the increases, but ultimately credited legislators for a “very bipartisan consensus that, given the soft economy, now is not the time to raise the taxes on anything.”

Usually fighting to halt tobacco taxation, Thomas Briant, executive director of the National Association of Tobacco Outlets, is hopeful, with states continuing to consider decreases and others not passing increases. “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,” he says.

Meanwhile, execs from both Altria Client Services and R.J. Reynolds recommend retailers keep the conversation going with their local legislators.

Bruce Gates, senior vice president for Altria Client Services, points out that “lower taxes means [retailers] get to hold on to that revenue, allowing them to hire employees and expand their operations.”

And John Singleton of R.J. Reynolds says that being active on the local level “has so much more impact” than anything his company can do as a large corporation with a vested interest. Retailers, he says, can have a potential influence on tax revenue and employment, “two things that are very much at the forefront of politicians’ minds these days.”  

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