WASHINGTON — Americans’ smoking habits experienced “sizable market shifts” since federal tobacco taxes were increased in 2009, a new government report concludes.
Sales of pipe tobacco and large cigars, which are taxed at a lower rate, have skyrocketed as smokers have adjusted their buying habits to the new price structure.
Pipe tobacco is increasingly used to make relatively inexpensive cartons of roll-your-own cigarettes. The Fox Valley has several shops with roll-your-own machines available for customers.
Kim Schafer of Appleton Souvenir and Cigar Co. said she’s noticed changing trends in tobacco use.
“Actually, a few more people are picking up pipe smoking,” Schafer said.
Monthly sales of pipe tobacco increased twelve-fold, from about 240,000 pounds in January 2009 to more than 3 million pounds in September 2011, the General Accounting Office found. Monthly sales of large cigars more than doubled, from 411 million pounds to more than 1 billion pounds over the same period.
Congress increased taxes on both roll-your-own tobacco and packs of cigarettes in April 2009, making them equal. Lawmakers enacted a smaller tax increase for pipe tobacco, which has become a substitute for roll-your-own tobacco. In Wisconsin, state cigarette taxes have increased by a $1.75 per pack since the end of 2007 to the current $2.52, making roll-your-own tobacco a cheaper alternative to manufactured cigarettes.
Likewise, Congress began taxing small cigars at the same rate as cigarettes. In response, manufacturers of small cigars fractionally increased the weight of many of their products so they would qualify as lower-taxed large cigars, even though they often are just slightly larger than cigarettes and often have filters.
Premium handmade large cigars retail for $3 to $20 and more each, but “smaller factory-made cigars that meet the legal definition of a large cigar can cost as little as 7 cents per cigar,” the GAO reported.
The market shift has cost the federal government an estimated $615 million to $1.1 billion in uncollected tax revenue between April 2009 and September 2011, the report said. It did not estimate how much individual states may have lost in uncollected taxes.
“That’s real money and a tax avoidance scheme Congress ought to be interested in stopping,” Gregg Haifley, associate director of federal relations at the American Cancer Society Cancer Action Network, said of the GAO report. “It’s also counterproductive for the public health benefit of tobacco taxes.”
Report urges closing tax loopholes
Liggett CEO Ron Bernstein, whose company sells discount cigarettes that are taxed at the higher rate, said his company estimates the tax loopholes have cost the government even more. About 2.7 million people purchased roll-your-own cigarettes last year, and that could grow to 3 million in 2012, he said, citing data from the Treasury Department and the Centers for Diseases Control and Prevention.
In a written response to the GAO report, Treasury officials noted that the numbers in the report “are not actual losses of revenues, but rather your estimates of the revenue increases if Congress were to change the law to eliminate the disparities.”
And that’s the GAO’s recommendation: Congress should fix the disparities.
According to the GAO report, a woman representing one tobacco company said she knew of no difference between the roll-your-own tobacco her firm formerly produced and the pipe tobacco it switched to making — other than the federal excise tax.
Sen. Tom Harkin, D-Iowa, has 15 cosponsors for legislation to eliminate the tax disparities to provide revenue for helping to fund the Individual with Disabilities Education Act, but the bill is stuck in the Senate Finance Committee.
In contrast, 176 House lawmakers and seven senators are co-sponsoring the Traditional Cigar Manufacturing and Small Business Jobs Preservation Act, which would exempt large and premium cigars from regulation by the Food and Drug Administration.
The Family Smoking Prevention and Tobacco Control Act of 2009 gave the FDA immediate authority to regulate most tobacco products but required the agency to go through a rule-making process to regulate cigars and pipe tobacco.
The lead sponsor of the House bill, Republican Rep. Bill Posey of Florida, views the issue as one of personal freedom for “aficionados who enjoy smoking a premium product,” said spokesman George Cecala. “It will be unprofitable to have a cigar shop. It’s a niche thing that adults do. It’s not something that children do.”
Currently, cigars are defined as large if 1,000 of them weigh at least three pounds. That would be doubled to six pounds under the House bill. Large and premium cigar wrappers would have to be entirely composed of tobacco, instead of just having some tobacco content. And the large premium cigars would not have filters.
The bill, however, doesn’t have a tax component in its current form. It would not change the tax code’s definition of a large cigar.
Smoking creates hidden costs
Protecting smoke shops or cigar shops as small business overlooks the broader impact of smoking on all businesses, according to Frank Chaloupka, an economics professor and director of the Health Research Center at the University of Illinois at Chicago.
“Business themselves are bearing part of the cost of tobacco use by their employees,” he said. “Their smoking employees are going to miss more time at work. They pay higher health insurance premiums because of their smoking habit. I think it’s kind of shortsighted.”
Rep. Henry Waxman, D-Calif., expects the FDA to act soon to “deem” it has jurisdiction over pipe tobacco and cigars.
“Even as FDA takes appropriate action, the GAO report strongly suggests that progress on this front is tied to fixing current tax loopholes that give preference to pipe tobacco and large cigars making them marketplace alternatives,” Waxman said Tuesday. He added that the tax fix could be part of a larger tax bill considered in a lame duck session after the November election.
More immediately, the Senate-passed transportation reauthorization bill includes a provision that would stymie the growth of roll-your-own machines by designating smoke shops that have the machines as manufacturers.
The House has not voted on the issue, but freshman Rep. Diane Black, R-Tenn., has 59 cosponsors for a bill that would do that.
Tobacco use continues to decline
Smoking opponents say the tax loopholes are secondary to the more important and positive health news about decreasing tobacco use among Americans as a result of the April 2009 tax increase, when the federal excise tax on a pack of cigarettes rose to $1.06
The percentage of American adults who smoke declined from 20.6 percent in 2009 to 19.3 percent in 2010, according to the Centers for Disease Control and Prevention.
“When you look at the federal tax increase, it’s a public health win because tobacco consumption declined and it’s a budget win because revenue increased,” said Danny McGoldrick, vice president of research at the Campaign for Tobacco-Free Kids.
“And we would add it’s a political win because tobacco taxes are one of the few taxes large majorities of the public in both parties support. It would be a bigger public health win and a bigger revenue win if we could fix these loopholes that the tobacco companies are driving their trucks through.”
Cigarette sales dropped about 11 percent from 17.3 billion packs in the 12 months before the tax increase to 15.4 billion packs in the 12 months after the higher rates took effect, according to the Campaign for Tobacco-Free Kids.
— Post-Crescent staff writer Jim Collar contributed to this report.