On Nov. 8, California voted to raise taxes on tobacco products.
California’s Proposition 56 to raise the state excise tax on tobacco products by $2/pack on cigarettes to $2.87/pack and an equivalent amount on other tobacco products including e-cigs, passed by a wide margin on Nov. 8 (63%/37%). Meanwhile, similar ballots to raise cigarette taxes failed in Colorado (54%/46%), Missouri (60%/40% Amend 3; 55%/45% Prop A) & North Dakota (62%/38%), Wells Fargo reported.
This was the third time in the last decade that California voters weighed in on raising taxes on cigarettes and the first one to be passed.
Wells Fargo noted the decision was significant as California represents approximately 8% of the total U.S. cigarette industry volume, making it the 2nd largest cigarette consumer by state (2nd to Texas). Given California’s size, Prop 56 effectively increases the weighted average state excise tax on smokes in the U.S. by 17 cents per pack to $1.77 (+11% increase) and will drive average cigarette retail prices up by approximately 8% to $6.81/pack.
“We expect the industry to take a price increase of $0.07/pack (2-3% increase) next week led by Altria, consistent with feedback in our ‘Tobacco Talk’ surveys,” said Senior Analyst Bonnie Herzog. “Higher prices could lead to greater volume declines in FY17 and therefore we anticipate volumes to decelerate greater than our current -3% volume decline expectations.”
While California’s “win” could potentially encourage copycat efforts in other states, Wells Fargo doesn’t expect this to be a real risk. “We continue to believe the industry will be able to mitigate any elasticity-driven volume declines from tax pressures with pricing power, as it has through past tax cycles. We continue to maintain our bullish outlook on the U.S. tobacco sector and encourage investors to take advantage of today’s stock weakness,” Herzog said.