Report cites major shift in smoking habits since 2009 tax increase

[Thomas3.20.2010]

A new government report says Americans' smoking habits have displayed "sizable market shifts" since federal tobacco taxes were increased in 2009.

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.

Monthly sales of pipe tobacco increased 12-fold, from about 240,000 pounds in January 2009 to over 3 million pounds in September 2011, the GAO found. And monthly sales of large cigars more than doubled, from 411 million pounds to more than 1 billion pounds over the same period.

Pipe tobacco is increasingly used to make relatively inexpensive cartons of roll-your-own cigarettes in machines installed in neighborhood smoke shops around the nation.

In New York, where state tobacco taxes are among the highest in the nation, the machines are in smoke shops in Depew and Lewiston in the Buffalo area; at several locations in Rochester; in New Rochelle, Nanuet and Newburgh in the Hudson Valley; in Brooklyn and Staten Island in New York City; and in Ithaca in the Southern Tier.

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.

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 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."

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, but the bill is stuck in the Senate Finance Committee.

In contrast, 176 lawmakers 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.

New York co-sponsors of the House bill include Republican Reps. Tom Reed of Corning, Richard Hanna of Oneida County, Ann Marie Buerkle of Onondaga, Chris Gibson of Kinderhook and Michael Grimm of Staten Island as well as Democratic Reps. Bill Owens of Plattsburgh, Steve Israel of Dix Hills, Tim Bishop of Southampton, Charlie Rangel of Manhattan and Edolphus Towns of Brooklyn.

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.

Anti-smoking advocates 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 decreased 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 prior to the tax increase to 15.4 billion packs in the 12 months after the higher rates took effect, according to an analysis of tax data by the Campaign for Tobacco-Free Kids.

Phone calls to a toll-free quit-smoking line rose 49 percent in the 12-month period that began in February 2009, two months prior to the tax increase, compared to the same period a year earlier.

At the same time, revenue from the tax increase has been used to expand a federal program that provides health insurance to low-income children. Tobacco tax revenue rose 129 percent to $15.5 billion in the first 12 months the higher tax rates took effect, according to the Campaign for Tobacco-Free Kids' analysis.