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Proposed Tax Hike on Cigars to Fund Expanded Health Program is Major Threat to the Industry
I'd be hard pressed
to explain the Senate Finance Committee's proposal to raise federal tobacco taxes on cigars any better than Cigar Association of America director Norm Sharp did in his urgent July 17 alert to CAA members:
The proposed taxes in the current Senate Finance Committee proposal to fund expansion of the State Children's Health Insurance Program (SCHIP) solely through higher tobacco taxes will have a draconian impact on the cigar industry. Indeed, it is the biggest threat to the industry since President Clinton's proposal in the early 1990s to fund universal health care on the back of the tobacco industry.
Under the current proposal, the large cigar tax rate would increase 156.4% (from 20.719% to 53.13% of the manufacturer's selling price) and the current tax cap of around $0.05 per cigar would increase an astounding 20,413% to $10 per cigar-essentially making the cap irrelevant. All large cigars would effectively be taxed at 53.13% of the manufacturer's selling price. In all of the Internal Revenue Code, no other product is subject to an excise tax that approaches this level. The little cigar tax would increase 2,635%-from $1.828 per 1,000 to $50 per 1,000. To compound the injury, a floor stocks tax would be assessed on all products in inventory. Additional considerations:
While large cigars are the only tobacco product taxed on an ad valorem basis, the 53.13% tax rate can easily be compared with the effective tax rates on other products. For example, a $3 pack of cigarettes would be taxed at an effective 33% rate under the chairman's mark. As a further example, a $25 bottle (750ML) of 80-proof vodka is taxed at an effective rate of 8.5%.
Staff have indicated that a rationale for the massive tax increase on cigars is the fact that "premium" hand-made cigars under present-law are subject to the same cap that applies to lower-priced cigars. But that result is no different than for other luxury brand tobacco or alcohol products. For example, a $20 pack of "Treasurer" cigarettes is taxed just the same as a pack of Marlboros or Winstons, and would continue to be taxed just the same under the chairman's mark (i.e., $1 per pack). Likewise, under present-law alcohol taxes, a $100 bottle of wine is taxed at the same rate as a $10 bottle of wine.
The chairman's mark also includes a massive tax increase on small cigars (i.e., those weighing no more than 3 lbs. per thousand). Under the proposal, the tax on small cigars would be increased from $1.828 per thousand to $50 per thousand, an increase of more than 2,635%. Staff have indicated that this proposal is based on a concern that some cigarettes may be "masquerading" as small cigars. The proposal overlooks the fact that the Alcohol and Tobacco Tax and Trade Bureau has initiated a rulemaking project that will fully address the concern by providing objective guidelines for distinguishing between cigarettes and small cigars.
The chairman's mark also will result in a massive increase in the assessments paid by the cigar industry to the Department of Agriculture under the tobacco "quota" buyout program enacted in 2004. Because cigars never used price-supported quota tobacco, it was a policy mistake to include them in the assessment regime in the first place. Because the buyout program assessments are calculated by reference to excise taxes, the cigar industry would pay sharply higher assessments as a result of the proposal in the chairman's mark.
The bipartisan plan was drafted over the last six months by senior members of the Senate Finance Committee. The measure was due for final markup at press time, with consideration by the full Senate late in July.
E. Edward Hoyt III
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