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The Rising Cost of A Smoke: Perdue's proposed $1 tax on cigarettes and the 62-cent U.S. levy have smokers feeling overtaxed
Journal Photo Illustration by Richard Boyd II / AP Photo
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Published: March 19, 2009
Tobacco is no longer a sacred cow in North Carolina.
That's the conclusion of smokers interviewed yesterday about Gov. Bev Perdue's proposal to raise the state's cigarette tax by $1 from 35 cents to $1.35 a pack to help reduce a $3.4 billion budget shortfall.
"This decision is the pits," Debbie Davis said while dining at the Jimmy the Greek restaurant off University Parkway in Winston-Salem. The restaurant has catered to smokers and nonsmokers for decades.
"It's a slap in the face of the industry that has made North Carolina and Winston-Salem what they are over the years," Davis said. "It's one more sign that it's OK to tax smokers -- the outcasts of society."
Smokers find it hard to believe, especially during a recession, that Perdue would try to raise the tax, because its enactment likely would cost the state and local community even more manufacturing jobs.
Since 1983, lower consumer demand for cigarettes has played a key role in eliminating about 80 percent of the local work force through at least 16 job-cut announcements by Reynolds American Inc. and its predecessors. The company will have gone from 15,500 full-time workers to 3,130 once the latest job cuts are completed by early 2010.
Still, many of the smokers are resigned to the reality that the cost of cigarettes will go up again. They are just hoping that any tax increase would be added gradually, perhaps 25 cents at a time.
"Why are they trying to force us to quit smoking, trying to legislate morality?" Amy Westmoreland asked. She said she smokes about two cartons of discount cigarettes a week, in part to help maintain a lower weight after losing 40 pounds recently.
"I will continue to smoke before I gain that weight back," she said.
Jim Royall said during a post-lunch smoke at Omega House restaurant he doesn't believe that the proposed tax increase will affect many smokers.
"More people will switch to the off-brands than will quit," Royall said. "I know they need more revenue, but they need to spread it around to more sources, and not keep relying on cigarettes and forcing more tobacco manufacturers to cut their jobs."
Anti-tobacco advocacy groups are dogged supporters of raising cigarette taxes as a pivotal way to lower smoking rates, particularly among young people.
For example, the groups hailed the State Children's Health Insurance Program -- and the 62-cent rise in the federal excise tax on cigarettes that goes into effect April 1 -- in large part because analysts estimate that sales could decline by as much as 8 percent.
Other advocates back cigarette-tax increases to prod smokers to turn to lower-cost smokeless products.
However, some nonsmokers surveyed said that even though the goal may be admirable, they don't support the tax increase because of the uncertainty of where the extra revenue would be spent.
"I can understand about not smoking in a restaurant or trying to limit public smoking," said James Smith, a former Reynolds employee who said that having a heart attack in 2002 was the only reason that he stopped smoking.
"But the governor of a tobacco state should not be trying to hurt the economy through this step," Smith said.
Some analysts said that the higher tax could boost the sales of discount manufacturers with operations in the Triad, such as General Tobacco Co. of Mayodan and Renegade Holdings Inc. of Mocksville, at the expense of their larger competitors.
Cindy Denny, who was sharing a lunchtime smoke with Westmoreland, said she will likely switch to a discount brand to avoid paying more for cigarettes. "If they're that concerned about our health, they should tax food higher to help reduce obesity," she said.
Calvin Phelps, the chairman and chief executive of Renegade, said he isn't sure how much his company will benefit from the proposed tax increase.
"People may experiment with lower-cost packs, but most smokers are pretty loyal to their brand," Phelps said. "When there is a tax increase in cigarettes, there's typically an initial drop in sales, like there is with higher gas prices.
"Then people get used to the price and they absorb it. I'm hearing more people saying they will quit rather than switch to a lower-cost cigarette."
Because the proposed tax increase is across the board, discount brands may not see a significant increase in sales, said Charles Norton, the portfolio manager of the USA Mutuals Vice Fund.
"The proposed $1-a-pack state excise tax increase is a larger percentage hike on discount brands than it is on premium brands," Norton said. "I do not believe the price increase will necessarily spur any material downtrading."
■ Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.
The price to puff
Gov. Bev Perdue's budget proposal includes raising the tax on cigarettes as part of a plan to ease a projected budget shortfall of $3.4 billion in 2009-10 and $3 billion in 2010-11.
• Perdue would increase the cigarette tax from 35 cents a pack to $1.35, making North Carolina's tax the 20th highest in the nation, compared with the current rank of 45th.
• The cigarette-tax increase would generate $350 million in 2009-10 and $467 million in 2010-11.
• The proposed $1 state increase would be on top of a 62-cent rise in the federal tax on cigarettes that will take effect April 1. The state increase, if approved by the legislature, would take effect on Sept. 1.
• The state and federal increases would drive the average retail price of a pack of cigarettes in North Carolina to almost $5.50.
• Taxes on other tobacco products would increase from 10 percent to 28 percent of wholesale price under Perdue's proposal.
Source: Gov. Bev Perdue's office
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