Pay Up If You Have To Light Up
Wednesday, April 01, 2009SUZANNE PRATT: A big Federal tax hike on tobacco products went into effect today. Uncle Sam will now collect more than a dollar on each pack of cigarettes. As a result, here in New York City which has the highest tobacco taxes in the nation, a carton of cigarettes now costs more than $100. Scott Gurvey looks at the impact on smokers and big tobacco.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here's a shocker. The huge increase in the Federal tax on cigarettes is not popular with smokers, even if they are resigned to it. All day, the guy behind the counter has been getting an earful.
AMBALAL PATEL, NEWSTAND OPERATOR: The new tax people cannot afford with the recession and they don't get a salary increase and everything is so expensive and people are working two jobs. They can't make the rent plus the telephone bill and the light bill, transportation, everything is too expensive.
GURVEY: Until now, most of the taxes on cigarettes and other tobacco products have been set at the state and local level. They vary widely and their impact has been piecemeal. Jack Russo of Edward Jones says this Federal action is different.
JACK RUSSO, TOBACCO ANALYST, EDWARD JONES: This Federal excise tax increase is going to affect the whole United States at one point in time. So certainly the impact is going to be a lot greater. The magnitude of any fall off in sales or consumption is going to be a lot greater with this excise tax going through.
GURVEY: About one in five Americans currently smoke. That number is dropping by about 3 percent a year. The new tax will be a deterrent, but how much is a matter of debate. Morningstar's Philip Gorham predicts the impact on smokers will be sharp, then wear off.
PHILIP GORHAM, TOBACCO ANALYST, MORNINGSTAR: We're expecting a decline of about 5 to 6 percent this year quickly reverting back to about three percent in the longer term.
GURVEY: The manufacturers actually pay the tax and have been raising wholesale prices in anticipation. This has already cut into volume but Russo says volume and revenue are not really the measures by which analysts judge the tobacco industry.
RUSSO: Really what's focused on here by Wall Street is the profitability of these companies. In a crazy way by the tobacco companies raising prices, they will continue to be pretty darn profitable companies. So it hasn't had as big of an impact on the stocks as one might think.
GURVEY: If you think switching to cigars will let you escape the tax increase, think again. The new tax applies to all tobacco products. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
