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By Mehgan Belanger
WINSTON-SALEM, N.C. -- Cigarette manufacturer R.J. Reynolds Tobacco Company (R.J. Reynolds) recently voiced its opinion against a 61-cent per pack increase in federal taxes on cigarettes to fund an expansion of children's healthcare, stating that smokers are already burdened by high taxes, and described the domino effect such an impact would have on all aspects of the tobacco industry, from farmers to retail outlets. The company has launched a Web site -- www.nocigtax.com -- encouraging adult smokers, wholesalers, retailers, growers and anyone else opposed to excessive government taxation to contact their elected officials and voice their opinion.
The 61-cent increase on cigarettes would boost the federal excise tax 156 percent to $1 per pack. It would be the first time that the tax would increase more than a dime, and the first federal tax increase since 2003. The increase would go towards an expansion of the State Children's Health Insurance Program (SCHIP), a program developed for uninsured children, and cover an additional two million children with $35 billion raised over five years. While last week a tentative deal was arranged between Democrats and Republicans on the Senate Finance Committee to impose the increase, the bill -- introduced by Oregon Senator Gordon Smith -- still needs finalization before going to a vote.
To support its stance, R.J. Reynolds enlisted Orzechowski and Walker, an economic and policy research and analysis firm based in Arlington, Va., to analyze what effects would be seen if the cigarette tax were to increase to $1 per pack.
The U.S. smoker population -- about 20.5 percent of the total population -- paid approximately $32.555 billion in payments in the 2006 fiscal year, $14 billion of which went to state excise taxes, according to R.J. Reynolds. In addition, from 1998 to 2006, U.S. smokers have paid $62.2 billion in tobacco settlement payments, the company stated.
Such an increase would reduce the volume of tax-paid cigarette sales in the nation by an estimated 5 percent to 6 percent -- totaling 1 billion packs the year of implementation -- which would also reduce state excise taxes and settlement payments, and impact tobacco retailers, wholesalers and tobacco farmers, along with the manufacturing and other industries that supply core tobacco industries with resources, the Orzechowski and Walker study stated.
The decline in volume would have a magnified impact on the convenience industry -- as the majority of tobacco sales occur in c-stores, cigarettes are the number one selling in-store product category and it makes up more than a third of merchandise sales, according to the study. Including other retail channels that sell tobacco, gross profits lost because of the tax increase could total $650 million, the study stated. In addition, the increase would also cut more than 12,000 jobs from the tobacco industry -- including nearly 5,500 tobacco retailing and wholesale jobs.
With the possibility of at least a 5-percent decrease in cigarette volume, total state cigarette tax revenues could drop by about $571 million per year, according to R.J. Reynolds. Also, Master Settlement Agreement payments to the states could fall by $430 million per year, as they are dependent on cigarette volumes.
The increases will also have a domino effect on a number of other factors, including crime and violence, smuggling and educational programs such as health care and education, the study found.
The federal tobacco tax increase will also make cigarettes more valuable, which would lead to increased theft -- in both retail outlets and distribution points, the study stated. In addition, cigarettes would become more lucrative for gangs and organized crime to steal and funnel into black markets. Further, consumers will turn to tax avoidance measures to buy cigarettes -- international Web sites, Native American reservations and the black market. In all instances, the projected increase in revenue from the proposed tax will not be reached as smokers turn to tax free ways to obtain their cigarettes.
States rely on tobacco tax revenues to fund a variety of programs, from public education and children's services to health care and more. The proposed federal tax increase could put established and much-needed programs in jeopardy -- without adding significant value at the federal level, the company stated.