Other debate on tobacco hikes: Who will end up paying?

07/18/2005

Paul Levy, Star Tribune
July 18, 2005

For 33 years, Rich Lewis has repaired pipes at his family’s downtown Minneapolis tobacco store, where cigarette sales make up just a sliver of the business.

Cigars and pipe tobacco are the specialty at Lewis Pipe and Tobacco, and pipe repair is Lewis’ art.

“Am I going to get retrained by the state after they put me out of business?” Lewis, 53, asked last week after the state passed a “health impact fee” that officials say will raise $401 million over two years by charging an additional 75 cents per pack of cigarettes and doubling the excise tax on other tobacco products. “Who’s really paying for this new law?” Lewis asked.

Experts from Blue Cross and Blue Shield of Minnesota say the new law is expected to reduce smoking among teens by 14 percent and among all Minnesotans by 8 percent—meaning 55,000 young people alive today won’t start smoking and 17,000 fewer of them will eventually die of tobacco-related causes.

And there is hope that the increases will reverse a trend among price-sensitive 18- to 24-year-olds—an age group whose smoking rate is 39 percent higher than any other age group, according to the Minnesota Partnership for Action Against Tobacco (MPAAT).

But if the law reduces the number of smokers in Minnesota, would the base needed to produce $401 million over two years have been reduced as well? Tom Briant, whose Minnesota Wholesale Marketers Association represents 14 Minnesota tobacco wholesalers, thinks so. He adds that the law is expected to spur illegal smuggling of tobacco over state lines and a glut of illegal cigarette sales through the Internet and new mail-order sites.

State officials say they have accounted for reduced in-state cigarette sales in their revenue calculations.

That leaves Lewis’ $401 million question: Who pays for all this?

“I look at this tax and for every $1,000 ... I receive, I have to pay $700,” said Lewis. That includes the 35 percent existing tax that Lewis already paid on noncigarette tobacco and, under the new law, an additional 35 percent he must pay.

Tobacco Road, another family-run store in downtown Minneapolis, sells 50 brands of cigars and 50 brands of tobacco. Cigarettes account for only 12 percent of the 35-year-old store’s business, said owner Mark Taggatz.

“We have customers who have been buying from us for 30 years, who smoke pipes as a leisure thing. And they’re worried,” Taggatz said. “A $10 cigar will sell for $15. This is going to drive business away.

“With the restaurants and bars in downtown Minneapolis and St. Paul going smoke-free, this has a double impact on us. We’re not a convenience store. Tobacco is all we sell. Eight [store employees] may lose their jobs as a result of this.”

Convenience buy

Higher tobacco prices should have a significant effect on reducing the number of new smokers and on tobacco consumption in general, said Dr. Marc Manley, executive director of the Center for Tobacco Reduction and Health Improvement for Blue Cross and Blue Shield of Minnesota. But tax increases are not likely to force tobacco merchants out of business, Manley said, citing studies among the 30 states in which tobacco taxes have been raised in recent years.

“You hear stories from the tobacco industry about how terrible things will be for the small tobacco stores, but it hasn’t happened,” Manley said. “People tend to buy cigarettes where it’s convenient. They’re not going to go out of their way or travel great lengths to cross state lines to buy cigarettes.”

Adults cannot legally bring more than one carton of cigarettes across state lines, said George Hoyum, director of special taxes and overseer of the cigarette and tobacco division of the Minnesota Department of Revenue.

But smokers don’t have to travel very far to affect businesses, said Wayne Kampen, manager of Johnson Candy and Tobacco, a wholesale company in Brainerd, Minn. Fifteen percent of his business is with Duluth retailers, who now worry that customers will buy tobacco products in Superior or elsewhere in Wisconsin. The tax on a pack of cigarettes in Wisconsin will now be 46 cents less than the total in Minnesota.

The tax and fee on a pack of cigarettes in Minnesota under the new law will now be $1.23—12th highest in the country. Rhode Island is highest, with a tax of $2.46 per pack. In border states, the tax per pack is: Wisconsin, 77 cents; South Dakota, 53 cents; North Dakota, 44 cents, and Iowa, 36 cents.

“A major part of our business used to be tobacco, but now my main business is collecting taxes for the government and not getting a penny for it,” Kampen said.

“And to compound matters, with the price increase, sales will go down.”

Some 6,000 fewer adults won’t die of smoking because of the increased tax, predicts Blue Cross’ Manley. But hundreds of jobs statewide are expected to be lost because of the latest tobacco tax increases, said Briant of the wholesalers group.

“Smokers are the most discriminated minority in the U.S. today,” said Forbes Martinson, a smoker and the former mayor of Pequot Lakes, Minn., north of Brainerd. “This tax increase is just not fair.”

Hitting the poor

Minnesota had last increased its tobacco tax in 1992. The cigarette tax in Minnesota was 48 cents per pack, far below the national average of 84. In a recent survey, 67 percent of Minnesotans supported a $1-per-pack increase in the cigarette tax, according to MPAAT.

Since January 2002, 36 states and the District of Columbia have increased their tobacco taxes. Seven have done so more than once in the past three years, according to MPAAT.

But that doesn’t mean tobacco prices have to increase by the same amounts. The big tobacco companies that are making enormous profits could reduce the price of cigarettes as cigarette taxes increase, Manley said.

“Increasing the price will have a significant impact on reducing smoking, and that’s wonderful,” Manley said. “If the tobacco companies choose, they can soften the cost to customers. They have the choice of cushioning the fee.”

Assuming much of the new cost is passed along to smokers, lower-income people will pay the most, literally and proportionately. Lower-income folks are more likely to smoke. A study by KPMG Peat Marwick found that families earning $30,000 a year pay more than half of all the taxes paid on cigarettes.

A 2005 study by the Institute on Taxation and Economic Policy showed that cigarette taxes are 10 times more burdensome to lower-income taxpayers than for the wealthy.

The number of cigarettes being consumed has decreased in the past decade, said Hoyum of the Minnesota Department of Revenue. In 1997, major manufacturers produced 471 billion cigarettes in this country. Those manufacturers now produce 334 billion cigarettes in the United States.

“Seventy percent of smokers want to quit,” said Andrea Mowery, a MPAAT spokeswoman. “We offer free services. But for some people, maybe an increase in price will be the tool to make them quit.”