Cigarettes: Taxation Taking a Toll

Cigarettes by far continue to be the top in-store category based on sales dollars. On a monthly basis, the industry per store average for 2007 was $39,127. However, its gross profit contribution slipped to 3.2% to $6,152 falling behind package beverages ($6,526.)

The reason tobacco fell to No. 2 is simply taxation. Since 2002, 43 states have hiked smoking surcharges, which last year hauled in $14.5 billion nationwide.

New York is a prime example of tobacco’s overtaxation. In June, the state a added $1.25 per-pack hike to bring New York’s state surcharge on cigarettes to $2.75, which, coupled with the city’s own $1.50 tax, means Big Apple smokers are footing the highest tobacco taxes in the nation, with pack prices soaring past $9 in some city convenience stores.

"It’s over-taxation, and the legislators are killing the goose that’s laying the golden egg," said Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO).

"Hijacking a Marlboro truck can often be worth more than a Brinks truck," said Gerald Prante, a senior economist with The Tax Foundation, a nonpartisan tax research group based in Washington.

"States are constantly seeking new sources of revenue, and cigarette tax always comes up as one that is politically more palatable," noted Jim Calvin, president of the New York Association of Convenience Stores (NYACS). "There is always the political cover that it is designed to deter smoking, which would be true if the smoking population were a captive audience. Unfortunately, they are not, so any increase in the cigarette tax is only going to cost us more business and cost them more tax revenue. And it’s not going to compel anybody to stop smoking, so it’s a lose–lose–lose proposition."

 

Flawed Logic

The ironic part is that, in many cases, states may actually be losing money by raising taxes. For instance, the number of packs of cigarettes being sold in New Jersey, which has the highest tobacco excise tax in the nation at $2.57 per pack, has been steadily dropping, while neighboring Delaware’s has almost doubled.

Where are the dollars going? The winners are nearby states with lower taxes, bootleggers, Native American reservations and the Internet.

At best, tax increases are an imprecise tool. Case in point: all 50 states have excise taxes on cigarettes. But of the 40 that increased them between fiscal years 2003 and 2005, only eight met or exceeded revenue projections. Of the 32 that fell short, New Jersey missed by the largest margin, 67%, followed by Wyoming at 59% and Connecticut at 43%.

Taxes aside, one trend worth noting for retailers is fire-safe cigarettes. These cigarettes are rolled with a type of paper different from that used in regular cigarettes. Fire-safe smokes are made with paper that has thicker bands that act as "speed bumps" to keep tobacco from continuing to burn unless given a fresh drag of oxygen, and state officials are noticing.

In 2000, New York became the first state in the country to require fire safety cigarettes and since then, at least 30 states have enacted similar legislation.

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