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Federal Tobacco Taxes To Make Biggest Jump Wednesday

However they satisfy their nicotine cravings, discount cigarettes users are facing a big hit as the single largest federal tobacco tax increase ever takes effect tomorrow.

Tobacco companies and public-health advocates, longtime foes in the nicotine battles, are trying to turn the situation to their advantage.

The major cigarette makers raised prices a couple of weeks ago, partly to offset any drop in profits once the per-pack tax climbs from 39 cents to $1.01.

Medical groups see a tax increase right in the middle of a recession as a great incentive to help persuade smokers to quit. Some retailers see it as another hit to business during the economic downturn.

Tobacco is the No. 1 product sold inside convenience stores, said Mike O'Connor, president of the Virginia Petroleum, Convenience and Grocery Association.

"These days, when the margins on gasoline are squeezed, it is the inside store sales that keep these guys operating," O'Connor said.

Tobacco taxes are soaring to finance a major expansion of health insurance for children. President Barack Obama signed that health initiative soon after taking office. The total expected to be raised over the 4½-year-long health-insurance expansion is nearly $33 billion.

Other tobacco products, from cigars to pipes and smokeless, will see similarly large tax increases. For example, the tax on chewing tobacco will go up from 19.5 cents per pound to 50 cents.

George Koebel, owner of several Richmond-area Havana Connections cigar stores, said the new federal taxes, combined with a restaurant smoking cigarettes ban in Virginia that takes effect in December, could be a "double whammy" to his business.

"I would say it impacts our sales greatly," he said.

Henrico County-based Philip Morris USA, the largest tobacco company and the maker of Marlboro, is forecasting a drop in sales, but spokesman Bill Phelps said he cannot predict how big.

Philip Morris raised Marlboro prices by 71 cents a pack early this month, and prices on lesser brands by 81 cents a pack. Other major companies followed suit.

"People are fussing and raising Cain about it, but we tell them, 'What can we do?'" said W.T. Burkett, who owns The Tobacco Store on Patterson Avenue in Henrico. "I think we are going to notice a drop in sales. A lot of people are saying it is time to quit."

The price increases have raised eyebrows among some in the industry. "That's nothing more than greed," said Kevin Altman, an industry consultant who advises small tobacco companies.

Responded Phelps: "We raised our prices in direct response to the federal excise-tax increase, and people who are upset about that should find out how their member of Congress voted, and contact him or her."

Phelps said yesterday that the company's cigarette price increases also will help cover costs such as the additional taxes that manufacturers, wholesalers and retailers must pay on inventories when the new tax goes into effect.

Virginia's excise tax on discount cigarettes is 30 cents per pack. The average state tax is $1.21 per pack.

The federal tax increase is only the first move in a recharged anti-smoking cigarettes campaign. Congress also is considering legislation to empower the Food and Drug Administration to regulate tobacco.

Prospects for reducing the harm from smoking cigarettes are better than they have been in years, said Dr. Timothy Gardner, president of the American Heart Association. The tax increase "is a terrific public-health move by the federal government," he said. "Every time that the tax on tobacco goes up, the use of cigarettes goes down."

About one in five adults in the United States smokes cigarettes.

Eric Lindblom, research director for the Campaign for Tobacco-Free Kids, said he expects a drop of at least 6 percent to 7 percent among young smokers.

Some policy analysts have questioned the wisdom of boosting tobacco taxes to finance health care for children. They argue that the fate of such a broad program should not depend on revenues derived from a minority of the adult population, many of whom have low incomes and are hooked on a habit.

The tobacco industry also is warning that the steep increase will lead to tax evasion through old-fashioned smuggling or by Internet purchase from abroad.

But smoking cigarettes-control advocates such as Lindblom say tobacco taxes should be even higher. "There's a lot of room to go after cigars and smokeless," he said. "We are certainly hopeful that health-care reform will include some more increases."

The tax changes could benefit moist smokeless-tobacco products, which remain at a relatively low tax rate compared with cigarettes, said Gerry Roerty, vice president and general counsel at Swedish Match North America, a Chesterfield County-based maker of smokeless tobacco and cigars.

"However, we do think it is going to have a short-term negative impact on all [Swedish Match products], while retailers get their inventories correct," he said. "We think the [sales of products] will all come back after a couple of months."

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