Tobacco Industry - Consequences of the SCHIP Federal Excise Tax Increases..

February 3, 2009 - If the SCHIP (State Children's Health Insurance Program) expansion is passed it will become active on April 1, 2009. According to a report from Fitch Ratings, the additional 61-cent tax on a pack of cigarettes will produce a volume decline of approximately 3.5% to 7%. "While tobacco products are relatively price inelastic, they are not perfectly inelastic," said senior director Wesley E. Moultrie II. "As a result, near-term revenue and operating income growth may be negatively impacted, leading to weaker credit measures."

Fitch further noted, with cigarette volumes decreasing as a result of the increase in the federal cigarette excise tax, state cigarette excise tax revenues will consequently fall. A number of states have dedicated programs funded by their own cigarette excise taxes, meaning states will have to cut their dedicated programs or increase their state cigarette excise taxes. In addition states' budgets are facing record shortfalls; some 45 states are projecting budget deficits for fiscal year 2009 and/or 2010. So-called "sin taxes," taxes on tobacco and alcohol, will be popular revenue sources for state governments looking to somewhat offset revenue shortfalls.

Approximately 117,000 jobs lost in the wholesale and manufacturing tobacco sectors in an industry that employs about 2 million.

Perhaps the category hardest hit by the bill is roll-your-own (RYO) tobacco, which will see a tax increase of nearly 2,200%. In a Kraft/CSP Daily News Poll yesterday (2/2/2009), nearly 60% of the 150 respondents said they expect the tax increase will "kill" RYO tobacco sales. Tom Briant, executive director of the National Association of Tobacco Outlets (NATO): "If you do the math and you buy a quarter-pound of RYO tobacco, plus your tubes and your machine, it's still about 50% less than the cost of fully manufactured cigarettes. So I think RYO will survive. Will it be different? Absolutely. But sales will drop."

So is there an up side as a result of the new taxes? Depends on your point of view, but for manufacturers of other tobacco products - most of which also will see tax increases - this may push more consumers to sample or move to products such as snus and moist smokeless tobacco.

Reference: Tobacco Tax Turmoil (Part 2)
Roll-your-own to take tremendous hit as experts project sales declines, job losses
by Steve Holtz, CSP Daily News, 2/3/2009.

Archive of Supporting Documentation: SCHIP increased tobacco tax will black market flourish..; U.S. Senate passes SCHIP..; A final vote on SCHIP is expected today - Thursday, Janaury 29, 2009..; SCHIP federal tobacco tax increase will deter nearly 1.9 million kids from using tobacco..; NATO - reauthorize SCHIP without imposing tax increases on tobacco products..; U.S. Senate Committee Votes to Expand SCHIP..; SCHIP Expansion approved by U.S. House of Representatives..; U.S. Congress gets ready to pass expansion of SCHIP..;
SCHIP expansion legislation time to try again..;
Congressional Democrats have scrapped plans for another vote on expansion of the SCHIP..
AWMA urges grassroots effort to defeat FDA tobacco regulation and SCHIP..
U.S. Federal tax increase on tobacco - try it again..
U.S. House fails to override SCHIP expansion veto..
Congress Sends An Extension of the SCHIP to President Bush..
Bush vetoes 2nd bill expanding the State Children's Health Insurance Program (SCHIP)...
Revised State Children's Health Insurance (S-CHIP) Bill..
Bush's SCHIP veto stands..
US edges closer to federal tax hike on tobacco products...
Lawmakers in Washington are working to reauthorize the State Children's Health Insurance Program (SCHIP) before it expires on September 30, 2007...