March 11, 2009 - Convenience Store / Petroleum (CSP) Special Report: this is the second of a four-part CSP Daily News series on how the industry is reacting to the federal excise tax on tobacco that begins in April.
Kit Dietz, a longtime industry expert and consultant: "Whenever you get taxation to reach a point it's reaching today, the illicit markets are going to develop. To what point we don't know, but we all better be keeping a watchful eye," he told CSP Daily News. "That risk vs. reward is greater now," Dietz said during an exclusive interview. "The risk of getting caught hasn't changed, but with the increased FET, the reward has become much greater." (Dietz is talking about April 1, when the federal-excise-tax (FET) increase kicks in on virtually all tobacco segments to finance expansion of the State Children's Health Insurance Program (SCHIP).
Contraband is undermining the potential effectiveness of higher tobacco taxes. We know higher tobacco taxes reduce smoking. The presence of cheap cigarettes undermines this strategy, leading to higher smoking rates. Illegal cigarettes are defined as cigarettes and tobacco sold by individuals who are not paying the appropriate taxes or duty.
With an additional $6.17 tacked to a carton's federal excise tax, Dietz believes the U.S. may be hitting that threshold when the black market could surge as a viable consumer alternative to in-store purchases. "In Canada, legal consumption has declined by 9%, but the actual percent of smoking consumption has fallen by only 3%-3.5%," he said. "That means that most of those smokers that the government says aren't smoking are smoking but are buying cigarettes from the black market and not from their convenience stores."
Implicitly underscoring this concern, the federal SCHIP measure creates a new section called "Treasury Study Concerning Magnitude of Tobacco Smuggling in the United States." The legislation directs the Secretary of the Treasury to conduct a study to be submitted to Congress that reports on the "loss of Federal tax receipts due to illicit tobacco trade in the United States and the role of imported tobacco products in the illicit trade in the United States."
For Dietz, his concern is that legal tobacco trade be protected in the United States, a challenge exacerbated by the SCHIP legislation and recent Congressional movement to place tobacco under the oversight of the Food and Drug Administration.
"The decline rate of smokers isn't steepening in Canada, illicit consumption is rapidly increasing," he said. "The FET will have a negative impact on consumption. We need to protect the legal volume in the channel for legitimate manufacturers, distributors and retailers and take a united stand against illicit product sales in the U.S."
Related news brief: Taxes to fund SCHIP may slow illegal cigarettes into Canada..; SCHIP increased tobacco tax will black market flourish...
Reference: CSP Special Report:
Tobacco on Fire Pt. 2 With cigarette and OTP prices about to hit new record highs, the black market may flourish by Mitch Morrison, CSP Daily News, 3/10/2009.
Image - The National Coalition Against Contraband Tobacco is an organization dedicated to fighting the spread of illegal cigarettes in Canada.