PICKET: Tobacco tax's unintended consequences

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By Kerry Picket

COMMENTARY:

A federal tax hike on tobacco takes effect Wednesday, and it's no April Fool's joke. The federal excise tax on cigarettes will increase by 62 cents per pack, from 39 cents to $1.01 per pack. Additional increases will also affect roll-your-own cigarettes, cigars, and chewing and pipe tobacco, with revenues buttressing The State Children's Health Insurance Program (SCHIP).

Defenders of the tobacco tax increase say they're protecting children from tobacco products. However, this logic does not seem to apply to pipe and cigar smoking. The main demographic of those smoking cigars, for example, is not children. The National Cancer Institute confirms, "Cigar smoking occurs primarily among males between the ages of 35 and 64." Anti-smoking activists say, rather unconvincingly, that the new trend for cigar smoking is running younger these days and thus it is applicable.

But impact reaches far beyond tobacco users, many of them from lower economic classes. Many small businesses that rely on tobacco products for a large percentage of annual revenues will also take a financial hit as a result of increased credit card fees and other economic realities.

"The same happened when gas prices went up," explained Chris Tampio of the National Association of Convenience Stores (NACS). "We sell the same product, and it just costs more and our credit card fees go up. The largest issue for convenience store owners and petroleum retailers is credit card expenses."

NACS, the National Retail Federation and others have been fighting for legislation to curb the credit card fees for some time now. Tampio said that credit card fees take the largest bite out of retailer's bottom line. In the case of tobacco products, the increased taxes mean that higher credit card fees, which are calculated as a percentage of the overall sale, further erode their bottom line.

State budget planners and the taxpayers who fill state coffers by paying tariffs on property, gasoline and other revenue generators should also not rest easy. The National Tax Payers Union released a video in February showing how cigarette taxes in various states taxes failed to meet projected goals, requiring other means of taxation to make up the shortfall.The NTU video focuses in on how unreliable the cigarette taxes are.

As one example, the Wall Street Journal reported last Aug. 11 that Maryland's legislature doubled the cigarette tax in 2007 "to $2 a pack to pay for expanded health-care coverage … Cigarette sales have plunged 25%, and the state is in fiscal distress again."

Maryland pols were so concerned residents would travel to Virginia and other surrounding states for cheaper cigarettes that they made it illegal for Marylanders to carry two packs of cigarettes that weren't bought in the state.

The Journal, however, also included, in contrast, how Washington State dealt with the tax on cigars: "The legislature decided in 2005 to lower the 75% tax on cigars and other tobacco products as a way to raise revenue and help state retailers."

Jane Gravelle, senior specialist in economic policy at the Congressional Research Service, said, "It is generally recognized that cigarette taxes are one of the most regressive taxes … probably the most regressive of the federal taxes."

Patrick Fleenor of Washington D.C.'s Tax Foundation told The Washington Times how non-smokers are affected by the tax hike through ancillary crimes. "The problem historically in how it affects non-smokers," he said, "is that it leads to bootlegging and a lot of ancillary crimes. In the late 1960s New York estimated that about a quarter of all the cigarettes sold in the state were bootlegged and even more than that were in the city (New York City) itself. It put the legitimate cigarette industry under siege … truck drivers … people like that. It was difficult to move cigarettes around the city. There were a lot of hijackings — a lot of thefts. Truckers, people who worked in warehouses and all sorts of people like that were adversely affected. It has problems similar to [what you had] with prohibition."

Tampio agrees that crime will be a bigger problem with a higher tax on tobacco products.

"Convenience stores over the past 10-20-30 years have really tried to not be on the evening news for someone going to XYZ store being robbed," says Tampio. "They've put a lot of controls into that. They have drop safes. They have security cameras. They've really done a good thing, where you don't see them on COPS anymore."

Convenience stores have "taken the safety of their employees and their products to heart," Tampio continued. "Now we're seeing in some states where they have really increased the rates [of tobacco], that people are going back — and they're not going after the cash register, but they're going after the tobacco. The government has created a [costly] commodity in our stores and opens it up to theft. That theft is also taking place at the distributor level, at the warehouse, and at the whole supply chain."