Federal Cigarette Tax Going Up


WASHINGTON -- President Barack Obama signed legislation Wednesday to more than double the federal cigarette to pay for an expansion of health insurance for poor children.

Tobacco companies hurt by declining smoking rates expect the 62-cent increase -- to $1.01 per pack -- to further cut cigarette sales after it takes effect April 1.

The major tax increase on cigarettes, smokeless tobacco and cigars will fund a $32.8 billion expansion of the State Children's Health Insurance Program, providing coverage to an additional 4 million children.

"In a decent society, there are certain obligations that are not subject to tradeoffs or negotiation -- health care for our children is one of those obligations," Obama said at a signing ceremony at the White House.

It's not yet clear how hard the tax hike will hit tobacco companies.

Fitch Ratings, a bond rating firm, said it expects a 4 percent to 7 percent drop in cigarette sales this year.

Tommy Payne, spokesman for Reynolds American Inc., a tobacco company in Winston-Salem, N.C., said the company expects industry-wide volume declines of 6 percent to 8 percent.

David Sutton, spokesman for Philip Morris USA in Richmond, Va., said it was difficult to say how the tax hike would affect the company's bottom line.

The federal increase comes after a series of cigarette tax increases by dozens of states over the last five years. The trend has driven up cigarette prices and is expected to continue.

So far this year, 16 states have considered legislation to increase cigarette taxes, according to the National Conference of State Legislatures. Hikes are expected this year in states that have historically opposed raising cigarette taxes, including South Carolina, which has the nation's lowest state cigarette tax rate of 7 cents per pack, and Mississippi, third lowest with 18 cents per pack.

Richard Cauchi, health program director for the conference of state legislatures, said it's difficult to say how many of those proposed hikes will pass.

In 2007, tobacco tax hikes passed in 11 states. Last year, 20 states debated increases, but only two passed. They were unusually large -- a $1 hike in Massachusetts and $1.25 in New York. At $2.75 a pack, New York has the country's highest cigarettes taxes.

Two factors have the potential to spark another wave of tax hikes this year, tobacco analysts said. The prolonged economic downturn has created budget deficits in nearly every state. Lawmakers generally face less resistance to increasing 'sin taxes' than income taxes or sales taxes paid by everyone.

Job losses have swelled the ranks of the uninsured, and cigarette taxes are often pegged to pay for expansions of government health insurance programs.

The fact that Mississippi Gov. Haley Barbour, a former tobacco lobbyist, is backing a state tobacco tax hike "is the clearest indication yet that policy makers see the writing on the wall," said Pete Fisher, vice president for state issues for the advocacy group Tobacco-Free Kids.

"They have budget gaps to fill. Lots of governors see they can raise cigarette taxes without facing a backlash from voters who might oppose other kinds of tax increases," Fisher said.

Tobacco companies have fought the increases in every state. They argue that tax increases rarely bring in as much revenue as projected, because higher prices prompt some people to quit and others to buy untaxed cigarettes online or on Native American reservations.

Payne, the Reynolds spokesman, said the hike Obama signed Wednesday could hurt states that rely heavily on cigarette taxes. The volume declines prompted by the new federal rate will also cut state cigarette tax revenues, he said.

"They're not going to get the money they're expecting," he said.