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NATIONAL REPORT – Hiking the tobacco excise tax has long been a tool used by state and local governments to close their ever-growing budget gaps. Every several years, federal officials also join the fray -- and 2013 is one of those years.
Low grumblings made their way through the convenience and tobacco industries in April when President Barack Obama revealed his proposed 2014 federal budget, which includes a 94-cent levy increase on cigarettes, with a comparable raise in the levy on all tobacco products. While the move was rumored, some retailers were holding out hope the rumors would prove false.
According to Obama, the proposed tax increase is intended to help fund pre-kindergarten programs for 4-year-olds across the United States. If approved, the new federal cigarette tax rate would almost double in one fell swoop, jumping from $1.01 per pack to $1.95. The tax hike on the table is expected to generate approximately $78 billion over 10 years.
Convenience store retailers are obviously opposed to this move. More than increased revenue, they say another tax hike would add challenges to the already challenged world of tobacco retailing.
"It's not good," said Dave Williamson, retail vice president at Jubilee Food Stores, a division of Hill City Oil Co. in Louisiana. "I see the landscape changing so much."
Louisiana retailers and adult tobacco consumers in the state almost faced a double hit this year. At the beginning of the state's most recent legislative session, Rep. Harold Ritchie (D-75th District) proposed boosting Louisiana's cigarette tax from 36 cents a pack to $1.41. Retailers breathed a sigh of relief when he pulled the proposal in late May citing a lack of support.
According to Williamson, Louisiana c-store operators currently enjoy an advantage over neighboring states when it comes to excise taxes. Texas and Arkansas both have significantly higher tax rates — $1.41 per pack and $1.15 per pack, respectively — while neighboring Mississippi is only slightly more at 68 cents per pack.
"It is already a diminishing industry and to think you can tax it on its way out, for whatever reason, is not good," he said. North Carolina-based Brewer-Hendley Oil Co.'s Market Express convenience stores are also bracing for the impact any federal tax increase would have on its tobacco sales. "It will definitely decrease sales and profits in an already declining category," said John Valeri, buyer and head district manager for Market Express, operator of 16 stores.
Overall, tobacco accounts for 41 percent of inside sales at Market Express and is the No. 1 category chainwide, he added. In a switch from the industry standard, the tobacco category ranks No. 4 at Jubilee Food Stores' 44 locations; however, that in no way diminishes its importance, Williamson said. "As a store category, it is No. 4 in gross sales. It's an important category for me, but I don't do a lot of deals to get [tobacco consumers] in," he explained. "How long can I do that, I don’t know. If you give cigarettes away, you are making friends, but you are not making money."
Making matters worse, competition for the tobacco consumer continues to heat up. "Cigarettes are a profit piece for me. That is what's different about Walgreens or Dollar General selling cigarettes — for them, it is and it isn't," Williamson explained. "They want to get you in the store and then they have a lot of other opportunities for you to buy items that have margin. You are either pushing a basket or carrying a basket there. In a convenience store, it's in-and-out trade."
If approved, the proposed federal levy increase would be the second in four years for cigarettes. Obama's signature ushered in a 62-cent-per-pack increase in 2009. At that time, the hike (up from 39 cents per pack) was the largest increase made to the federal cigarette tobacco tax rate in U.S. history. This new proposal would top that.
The last hike, according to Valeri, decreased sales and took margins down at Market Express.
"It forced us to revisit how to offer tobacco in ways that still gave customers the convenience and value that they have come to expect," he said.
Jubilee Food Stores did not see a big hit to business as a result of the 2009 federal tobacco tax increase, but when you couple that with the several manufacturer price increases that have occurred since then, Williamson said it's getting harder to pencil the numbers. "The prevailing thought is consumers are still going to buy it — but to a degree," he said.
Williamson acknowledged that tobacco products have to be taxed, but thinks they should be taxed fairly.
For more industry reaction of the potential federal tobacco tax hike, see the July issue of Convenience Store News.