New Year to Bring Lots of Tobacco Developments

Source from:  Winston-Salem (NC) Journal 01/20/2009

The cost of buying tobacco products is going up in 2009. By how much, from which taxing sources and who will ultimately absorb the higher cost is what Reynolds American Inc. and the tobacco industry are studying. Analysts and politicians say they expect that the expansion of the State Children's Health Insurance Program, or SCHIP -- paid for primarily by a 61-cent increase in the federal excise tax on cigarettes -- will be passed by Congress, signed into law by incoming President Obama and in effect by early April. At the same, as many as 44 state legislatures may consider raising their tax on tobacco products to cover budget deficits. And there's expected to be another major push toward giving the Food and Drug Administration regulatory power over the industry. Closely following these developments is Tommy Payne, the executive vice president of public affairs for Reynolds. He recently took time for an interview on these legislative issues. An edited version follows: [b]Q. What kind of legislative challenges and changes does Reynolds expect in 2009?[/b] [b]A.[/b] We anticipate a busy year at the state and federal level, and it's not as much the incoming administration as it is this Congress. We know that there is an effort to make the federal excise tax on tobacco, not just cigarette taxes, as the funding source for the expansion of the SCHIP program. We know that the bills that were introduced in the last Congress by Rep. Henry Waxman and Sen. Ted Kennedy for regulating the industry are going to be reintroduced. The third component of all this is that 44 states are projecting to have budget deficits in 2009, and they have constitution requirements that they balance their budgets. Higher taxes on tobacco products are being included as potential revenue fillers by more states than they were a few years ago. They are thinking what is the most politically convenient for me to get revenue to fund this program or fill this hole. [b]Q. Of those three, which one will get the most focus from Reynolds?[/b] [b]A.[/b] All three are very, very important issues. If you had to rank them, it would be the SCHIP issue first, considering it is the one being discussed the most now. There is a likelihood the 61-cent increase could go into place as early as April. As the state legislatures convene and start their work, we will get a better feel for the direction and seriousness each is taking toward raising state tobacco and cigarette taxes. [b]Q. What kind of revenue hit are Reynolds, and the tobacco industry, facing from the potential tax increases?[/b] [b]A.[/b] SCHIP is easy because the House passed the expanded tax twice and President Bush vetoed it twice. We're assuming at the end of the day it will be a 61-cent increase, taking the federal excise tax to $1. It will affect competitors equally. There's a guaranteed volume decline with the federal excise-tax increase, probably 6 percent to 8 percent. We're not opposed to SCHIP, but we are opposed to the funding mechanism for it. SCHIP, as a tax of convenience, will tax mostly those who are less able to pay the tax as they choose to use this legal product. Historically, tax increases at the federal level have been passed on to consumers -- even as those proponents of increasing cigarette taxes tend to indicate that everybody but the consumer will pay the tax. According to the Centers for Disease Control and Prevention, about 80 percent of the people who smoke make less than $75,000, and 99 percent make less than $250,000. There are more people below the poverty line purchasing cigarettes than those above the poverty line. So, the notion that no one under $250,000 will face a tax increase under the new administration will prove to be false within a couple of weeks of the new administration being sworn in. The state excise-tax situation is less clear because there is no one-size-fits-all approach. You make guesstimates on the tax projections and consider how that will affect sales volume. [b]Q. How long can tobacco-tax revenue keep SCHIP financed given the overall decline in U.S. cigarette sales?[/b] [b]A.[/b] There are two more factors in play with SCHIP than many people recognize. There are more people that will qualify for SCHIP since there are more households with unemployed people, and data clearly shows that tobacco tax as revenue is not a stable source because sales are declining. So, Congress appears ready to fund SCHIP with a tax that has no correlation to children's health and paid mostly by the working poor. You don't hear a lot of talk about Plan B for a revenue source for SCHIP. It's going to require Congress to come back in fairly short order and find more revenue in order to fund the expansion as tobacco-tax revenue trends downward, particularly as more smokers go to the Internet, to the black market, to Indian reservations to buy cigarettes more cheaply. [b]Q. So, are you saying that there isn't room for a major federal tobacco-tax increase and a major tax increase at the state level without it affecting the states' tobacco-tax revenue stream?[/b] [b]A.[/b] Even if the states do nothing, they will get less sales-tax money, less tobacco-tax money and less money from the Master Settlement Agreement (which is based on cigarette sales volume). Even with that situation, many states still will look at tobacco taxes to make up part of their deficits, so it can be a vicious Catch-22 from a revenue standpoint. It will be interesting for an economist to look back to see if Congress and the states made the smartest moves at that time in terms of using nonregressive, stable funding sources. [b]Q. Does Reynolds sense that FDA regulation is a done deal, and if so, do Reynolds and the industry have the capacity for carving out the less-harmful niche in any legislation?[/b] [b]A.[/b] After 15 years, it's yet to be sent to the president for his signature. That's the historical perspective. According to news reports, the administration doesn't have an official position, and it won't for at least some period of time. This Congress will be interesting in that there will be alternative legislation introduced in the House, and I believe in the Senate as well. It will provide significant regulation of the tobacco industry, and more directly address the issue of the usage of tobacco products by minors and address harm reduction. The Waxman-Kennedy approach is in essence a "Don't start, abstinence only" to reducing the consumption of tobacco products. Its goal is to decrease the total use of all tobacco products. The alternative bills, in utilizing the harm-reduction approach, will take the policy view of the product continues to be legal, and there will be a system set up to encourage tobacco users to go from burning products to nonburning products, and then to quit. For those, including us, who are proponents of harm reduction and the migration to noncombustibles, we view that as a win-win because it provides for regulation of tobacco products in the United States and assures that there is in place a practical, proven and efficient way to reduce death and disease associated with tobacco use. And it can be done in a way that is more than adequately funded, doesn't cause existing agencies to divert resources from existing missions, like food safety and medical-device approval. It's also a win for tobacco consumers because it is much more aggressively in promoting education about the different risks in tobacco product categories and within those categories. Such as not all noncombustible products have the same level of reduced risks. It allows Congress to be consistent with how it legislates harm reduction compared with other areas of minimizing risk in some categories, such as AIDS and the use of condoms, needle exchanges in the use of heroin, side air bags in the use of an automobile. Enditem