The Tax Train Keeps Rolling

January could not end soon enough. The industry hasn’t seen such a tumultuous month since November 1998 when Congress first turned to tobacco as its financial panacea. Big Brother was at it again last month with the U.S. Senate passing the State Children’s Health Insurance Program (SCHIP)—including all of the cigarette and tobacco tax rate increases—by a 66-32 vote. To use a sports analogy, the score wasn’t even that close.

Once the Obama administration took office, there was little doubt the expansion of SCHIP was a top priority. As advertised, tobacco’s fait accompli was swift—it took less than 10 days from the inauguration of President Obama for SCHIP to pass in the House and the Senate.

The question now is what will this legislation mean for convenience store retailers? The answer is pretty simple: higher tobacco taxes and reduced tobacco sales. But what will this legislation do for the lawmakers that pushed for it? Well, if history is our guide, not too much. Past experience shows reduced tobacco tax revenues for many of the states supporting tax increases as smokers turn to Native American reservations, the Internet and other tax-free sources rather than pony up eight bucks for a pack of smokes. Who can blame them?

Increased taxes have been a disturbing trend for tobacco, one that started with the 1998 Master Settlement Agreement (MSA), but actually goes back even longer in states like New York and New Jersey. Tough economic times seem to exacerbate the problem.

With the economy spiraling into a deeper recession, lawmakers are desperate for additional revenue to continue funding state programs or to implement new ones. Tobacco all too often is the cash cow that nurtures federal and state coffers. It’s almost as if the government is jealous that tobacco companies—and convenience store retailers for that matter—meet their fiduciary responsibilities to shareholders and employees and display the fiscal prudence that has customarily eluded Washington.

Same Old Story
Here’s what recent history tells us when tobacco taxes are raised. For the past 18 months, a number of states raised the tariff on cigarettes and OTP only to subsequently discover that revenue collections are either less than before the tax increase or substantially below estimated revenue projections. In short, said Tom Briant, executive director of the National Association of Tobacco Outlets (NATO), “states have been strangling, if not killing, the goose that lays the golden tobacco eggs.”

This year, budget deficits have spurred another vain attempt to fill budget gaps. Specifically, the Center on Budget and Policy Priorities has identified some 27 states which have aggregate Fiscal Year 2009 budget deficits that total $49 billion dollars.

In addition to significant reductions in cigarette and tobacco sales, the fallout from SCHIP will likely include large increases in the number of store robberies because the value of tobacco products would be so high, a floor stocks tax on cigarette and tobacco inventory adding up to an estimated $5,000 per store, employee layoffs and even potential store closings, said Briant, whose members were organized, mobilized and very active voicing their opposition to SCHIP.

Indeed, all manufacturers, wholesalers and retailers will be required to pay a floor stocks tax which is calculated by multiplying the amount of the tax rate increase on each kind of tobacco product by the inventory on hand as of April 1. The floor stocks tax is due to the federal government by Aug. 1.

As one retailer told me after SCHIP was passed, the floor stocks plan is further proof that lawmakers could care less about legitimate businesses. “Tobacco taxes go up and they go up and they go up. That’s all they do and we have learned to live with that for a decade,” he said. “But what really makes me angry is that (lawmakers) don’t just want to tax what I’m selling, but what I’ve already bought. That’s all a floor tax does and I think it stinks.’

It’s a stench that spreads all the way to Washington.

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