Tax Attack

by Philip Hensley, Jr.
by Philip Hensley, Jr.

As Murray Rothbard once stated, smokers really are America’s Most Persecuted Minority. On February 4, 2009, President Obama (an occasional smoker himself) signed the SCHIP bill into law, thus continuing the government’s war on tobacco.

The federal tax on cigarettes is going up from $.39 a pack to $1.0066 per pack. While the increase will surely hurt the cigarette companies, and ultimately, the cigarette consumer, the real victim here is the roll-your-own (RYO) cigarette tobacco industry. RYO cigarette tobacco has become increasingly popular in recent years, especially as the economy has worsened, as it was cheaper to roll your own cigarettes instead of buying a pack of Marlboros. Staying true to the tradition of big businesses not really favoring less regulation and smaller government, the lobbyist for big cigarette companies sought and received the favor of raising the tax on RYO tobacco from $1.10 per pound to $24.78 per pound!

They certainly got their money’s worth. Not only did they turn their backs on their brethren in the tobacco industry, they essentially made it so that the RYO companies will be put out of business. Not only will it now be more expensive to roll your own cigarettes, and therefore eliminate the entire point of rolling your own, but many retailers and looking to blow out their remaining inventories of RYO tobacco before the $23.68 per pound floor tax takes effect on April 1. After that, many retailers are simply going to keep from ordering any more RYO tobacco and either exit the cigarette business altogether or simply sell packs of cigarettes.

Ironically, although not surprising, raising the taxes on tobacco products will in the long run bring in less revenue to the government. Colorado, for example, currently has a 40% tobacco tax on the wholesale price of large cigars. Until four years ago the tax was 20%. A retailer in Denver recently told me that the last year the tax was at 20% he sent around $85,000 to the state government in tobacco taxes. Last year, he sent less than $55,000. Similar stories have been told to me by other retailers in the state. Individual stick sales of cigars have remained steady, but sales of cigars by the box has virtually been eliminated, leading to less sales and therefore less taxes. Consumers are going online to order boxes of cigars from retailers or internet-only business from out of state. In many cases, a consumer can buy a box of cigars from an out of state dealer for less than a retailer in Colorado can buy it for after he adds in his wholesale tax.

Raising taxes again and again on tobacco products is not going to put the tobacco industry out of business. Rather, it is going to drive it underground and on the black market, as has happened with other heavily taxed items or items made illegal. Originally, the SCHIP bill called for a tax of up to $10 per cigar, while later versions of the bill capped the tax at $3. More than a few retailers have told me personally that if a tax of $3 were to be implemented on cigars, they would begin to do cash business under the table with regular customers that they could trust. The government is driving legitimate businessmen into situations where they have to act dishonestly in order to survive. In addition, many stores can no longer afford to hire additional employees. Because the cost of doing business in the tobacco industry has risen so much over the past few years, many cigar store owners are forced to be a one-man operation, whereas in previous years they could afford to hire employees to help them run the store for them. Right now is not a good time for the government to force retailers into letting go of employees.

Some in the cigar industry have stated that they are "thankful" that the tax on large cigars went up "only" $.35 per stick. With proposed taxes of $3–$10 per stick, they act as if we should be glad that the government was more "reasonable" in its approach. However, we should not be gracious to the government for finding a way to tax us just a little bit more. We should be demanding that they stop taxing us at all. Because in a few years when the tobacco taxes aren’t enough to cover the bloated coast of the current SCHIP bill, there are going to be calls to raise taxes yet again, and tobacco or tobacco-related industries will surely be one of the first places they look. We need to put our foot down now and stop this before the cigar business is shut down for good.

February 23, 2009

Philip Hensley [send him mail] is a recent graduate of the University of North Carolina at Chapel Hill. He currently lives in Durham, NC.

Copyright © 2009 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.