US: Kentucky Tax on Chew Tobacco to Drop

Source from:  Courier Journal 06/09/2013

Kentucky's tax on chewing tobacco will be cut by more than half in August, thanks to a little-noticed bill passed this year that has drawn the ire of health advocates.

The change will drop the tax on chewing tobacco from roughly 41 cents per pouch to 19 cents.

The cut will cost the state an estimated $425,784 in annual revenue, but improved collection of tobacco taxes required by the same bill could make up the lost revenue, according to a legislative staff analysis.

Regardless, health advocates argue a tax cut is the wrong move for a state wrestling with widespread health problems and some of the nation's highest rates for use of chewing and smokeless tobacco, particularly among teenage boys.

"When Kentucky consistently has the highest rates of tobacco use among kids and adults, and at a time when the state needs new sources of revenue, it does not make sense to lower taxes on tobacco products," said Amy Barkley, of the Campaign for Tobacco Free Kids. "... It's disappointing to see the legislature potentially making spit tobacco more affordable for kids."

House Bill 361 affects only the state tax on chewing tobacco, whether in its loose leaf, twist or plug forms. It does not change tax rates for moist snuff, cigars, pipe tobacco, cigarettes or any other tobacco product.

The current chewing tobacco tax is 15 percent of the wholesale price. The legislative staff analysis estimated the average wholesale price for a pouch at $2.75, which would put the current tax on average at 41.25 cents per pouch.

The legislative staff report said a firm number on Kentucky chewing tobacco sales was not available. But it said sales were "small" and roughly estimated that 1.9 million 3-ounce packages of chewing tobacco are sold in the state per year, generating about $790,000 in revenue.

The bill's sponsor, Rep. Rick Rand, D-Bedford, said the bill was intended to resolve problems and discrepancies that have lingered since Kentucky first imposed taxes on tobacco products other than cigarettes in 2005.

"We weren't zeroing in on the chewing tobacco and saying we need to do something for them," said Rand, chairman of the House budget committee.

But it is contrary to the recommendation from Gov. Steve Beshear's tax reform commission, which had pushed for the state to raise the cigarette tax from 60 cents to $1 per pack, and have the tax on all other tobacco products raised to 22.5 percent of the wholesale price.

"The tax commission recommended changes that would have raised an additional $10 million in revenue on other tobacco products and $100 million on cigarettes," said Jason Bailey, a member of the tax reform commission and director of the Kentucky Center for Economic Policy. "This showed again that we're dealing with tax issues in isolation and not looking at the big picture on tax reform.

"To actually lower a tobacco tax instead of raising it as the commission proposed is a step backwards" amid the present health concerns, Bailey said.

Barkley said she and other health advocates — who had lobbied unsuccessfully at the same time for a statewide smoking ban bill — never fully understood Rand's bill.

"It was presented as a technical change that had more to do with the way taxes were collected," she said.

Patrick Jennings, a lobbyist for Swedish Match North American, which manufactures Red Man chewing tobacco and other smokeless tobacco products in Owensboro, was the only witness to testify about the measure before any legislative committee.

He told House and Senate committees the bill was needed because when Kentucky first imposed taxes in 2005 on tobacco products other than cigarettes, it based its collection process on how cigarettes are distributed.

Other tobacco products are distributed differently, and as a result "the state is not getting all of the money that it should, and it's difficult for manufacturers and some wholesalers and retailers to comply," he said.

Rand explained in an interview that sometimes some other tobacco products, particularly premium cigars, are shipped directly from manufacturer to retailer without a wholesaler or distributor where tobacco taxes are collected. The bill creates collection points for such situations, he said.

And Rand said in discussions over the bill that he decided to address the discrepancy between the higher tax rate on chewing tobacco and the lower tax of 19 cents per tin on snuff. "That discrepancy has been out there since 2005. ... We thought this was an opportunity to resolve that and get support from other manufacturers."

In his explanation of the bill on the House floor, Rand did not say the bill cut the tax on chewing tobacco but said that for some tobacco products, the tax would switch "from an ad valorum to a unit tax."

Sen. Joe Bowen, R-Owensboro, didn't mention any change in tax rates for chewing tobacco when he explained the bill in the Senate, saying, "This bill is about creating better tax collection on dip, chewing tobacco, twist and plug tobacco, cigars and pipe tobacco."

The bill passed the House 83-11 and the Senate 33-3. The only no votes came from Republicans.

Rep. Joe Fischer, R-Fort Thomas, said he could not recall if he knew when he voted no that the bill cut the chewing tobacco tax. "We probably didn't believe that the bill was revenue-neutral," Fischer said.

Among those who voted yes was Rep. Susan Westrom, a Lexington Democrat who sponsored the smoking ban bill.

"I had no idea" the bill cut the chewing tobacco tax, said Westrom, who said she was upset that aspect of the bill was never clearly explained. "If I had known that, I could have asked some questions."

Beshear signed the bill into law March 22. "There were positives and negatives in the bill, but from our perspective the bill was revenue-neutral," said Terry Sebastian, spokesman for the governor's office.

Barkley said she hopes the tax cut's impact on public health will be minimal.

"But any tax cut that makes tobacco products cheaper can make them more accessible to kids because it generally results in a decrease in the retail price," she said. "Kids are a lot more price-sensitive than adults."

Dan Mulvaney, director of government relations for Swedish Match North America, released a statement that stressed the measure passed both chambers with bipartisan support and was not opposed by the Department of Revenue.

"We believe that the change in statute will enhance the overall collections of (other tobacco products) and is good public policy for the state of Kentucky," Mulvaney said. Enditem