Proposed US Tax Increase A Credit Drag for Cigarette Makers

Source from:  The Economic Times  04/12/2013

President Barack Obama's proposal to nearly double federal excise taxes to $1.95 on each pack of cigarettes would likely knock down sales volume 7 percent to 8 percent and is a credit negative for US tobacco companies, Moody's Investors Service said on Monday.

"The proposed tax hike amounts to an increase of more than 16 percent in the national average price per pack to nearly $7, and it would affect roughly 42 million US consumers who smoke cigarettes," the Wall Street agency said in a commentary.

Moody's said the tax proposal could accelerate a decline in the sale of cigarettes 7 to 8 percent, up from what is considered a secular decline of between 2 percent and 4 percent.

Drops in cigarette sales in recent years have hurt revenue paid to state governments that back tobacco-settlement bonds. Tobacco bonds are popular high-yield municipal bonds and were created after a late 1990s deal between state governments and tobacco companies to settle lawsuits over the costs to state governments of treating sick smokers.

Cigarette prices have been steady for two years because few states have lifted their tariffs and the federal government last raised the excise tax to $1.01 per pack from 39 cents in 2009, Moody's said.

The increase, which was proposed last week in the president's budget plan, would be a credit negative for US tobacco manufacturers Altria Group Inc, Reynolds American Inc, Lorillard Tobacco Company, Vector Group Ltd and North Atlantic Trading Co Inc , according to Moody's. Enditem