August 25, 2010 - A hefty state tobacco tax hike appears to have led to a huge drop in demand for cigarettes. But those who waged the war over the tobacco tax say it may be too early to draw conclusions about the long-term effects of the new tax.
Background: The tax increase took July 1, 2010.. A pack of cigarettes will cost $1 more. The tax on cigars will increase from 35 percent to 86 percent of the manufacturer's sale price. And the tax on moist snuff, or dipping tobacco, will rise from 75 cents to $1.83 per ounce.There is no way to track actual cigarette sales, but orders for the tax stamps that have to be attached to every pack sold in the state fell dramatically in July. Since July 1, when the state cigarette tax jumped from 69.5 cents per pack to $1.70, the Utah Tax Commission sold stamps for about 2.8 million packs of cigarettes.
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Utah has the lowest number of cigarette smokers in the United States. Only 9 percent of Utahns smoke, compared to about 21 percent of their fellow Americans.
That is about half as many as it sold on average for the first five months of 2010 and a huge drop from the more than 9 million stamps it sold in June, the month before the tax took effect.
“The magnitude of the drop surprises me,” said David Davis, president of the Utah Retail Merchants Association. “I think that folks were filling their cabinets or filling their pantries. They knew the tax increase was coming so they went out and bought ahead.” Jim Gibbs, owner of The Tobacco Store in South Salt Lake, said his sales are down sharply since the tax took effect. “Sales are down, I would guesstimate, somewhere between 25 and 30 percent,” Gibbs said. “I haven’t seen many people quitting. They’re just cutting back because they simply can’t afford it. They’ve taxed the lowest income people there is and that’s the smokers.”
Indeed, analysts projected that retail tobacco sales would fall by more than $50 million in the first year the tax was in place, but because of the higher rate, the state would receive $43 million in additional tax revenue.
Michael Siler, director of government relations for the American Cancer Society Cancer Action Network, said he hopes some of the reduction is due to people quitting the habit and suspects some is probably due to people who stocked up in June and some who have gone out of state, although he suspects that is a short-term phenomenon. “I think it’s probably a fact that people are going to cross borders for a while, but after a brief period of time, they’re going to get tired of that and we’ll see revenue increase significantly,” he said.
The big drop in demand for cigarettes has been offset by the spike in the tax, and overall the revenue the state has collected rose to $4.8 million in July, up from an average of $4.2 million per month for the prior year.
Gibbs said when a 70-cent-per-pack federal tax kicked in last year he saw sales slip, but only by about 10 percent and some of them came back. This time he said he doesn’t anticipate a return to the same volume as before because the government has simply made it too expensive. “[Customers] just don’t have the money. They taxed it too much is what they’ve done,” Gibbs said. “It’s just awful. It’s downright awful.”
But not all cigarette retailers have seen sales shrink. James Duke, president of the One Stop Smoke Shop, which has stores in Salt Lake, Ogden and Roy, said he is one of a few retailers he knows of who saw sales go up in July — by more than 100 cartons in his case. Duke said he thinks it’s because customers are looking for a deal and his prices tend to be lower than the convenience stores and he carries the cheaper products.
Davis said it will be interesting to see what happens with sales as people use up cigarettes they have stockpiled. “My guess is you’ll still see sales being down, but don’t confuse that with smoking being down,” he said. “I think we’ve pushed people into alternative channels — the Wyoming channel and the online channel.”
Reference: Tax hike leads to smoke sales plunge by Robert Gehrke, The Salt Lake Tribune, 8/24/2010.
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