Published on March 28th, 2017 | by Jimmy Hafrey
California voters elected to raise taxes on tobacco prices in November, but some tobacco companies have beat the state to the punch with their own increases in cigarette prices.
The Motley Fool is reporting that Altria has raised its cigarette prices by $0.08. The group, which owns Phillip Morris USA, John Middleton, and the U.S. Smokeless Tobacco Company, is said to have made the decision on the basis that California is getting ready to tax the industry, and so have simply introduced it ahead of the legislation date.
The state tax is set to add $2 a pack, increasing the total tax on the product from $0.87 to $2.87.
The excise tax law’s approval was never in question; California has had some of the highest tax rates for traditional cigarettes in the nation and its residents routinely approve tax hikes. The state is also the second-largest market in the United States for tobacco and houses around eight percent of the market alone; Texas is the largest.
Altria is focusing on offsetting the excise tax hike and recently announced the hike in price will go into effect on March 19, but it was quickly followed by other tobacco companies. Reynolds American announced a price hike that would go into effect on March 16. ITG Brands, which is a subsidiary group of Imperial Brands, and Liggett Vector, a company under Vector Group, both have announced price increases to hit the market on March 17 and March 20, respectively.
For readers who are not aware of how tobacco companies price their products, it is not unusual to see price hikes; in fact, the companies raise prices twice a year.
However, instead of the regular May and November price hikes, tobacco companies have split with tradition and moved their increases to March. This makes sense, as California’s excise tax increase will hit the market on April 1.
It follows that by voluntarily raising the prices on its products, a tobacco company can mitigate the hit to its profit margins when the tax hike goes into effect. These companies understand that people are addicted to cigarettes and will likely absorb the price increases, no matter how frequent or how much the increase becomes.
The tobacco industry and its smokers are an easy revenue stream for states, which is precisely why the government in California tends to increase the tax on these products. In fact, California is estimated to generate $1.4 billion in tax revenue from this tax hike alone.
While the ballot passed in California, which is largely a state full of residents in favor of taxing tobacco products, it is important to note that similar measures, which were filed in Colorado, Missouri and North Dakota all failed to get passed into law. Traditional cigarette smokers in those states have not yet had to deal with any sizable tax increases and may not for the foreseeable future. Other states, such as Wisconsin, Pennsylvania, and Indiana, have all seen increases in both excise and wholesale taxes.
This is important for vapers, because in many states, including California, vape products are also taxed at the same rate as traditional tobacco products.
Per the FDA regulations on vape products, vape liquids are considered tobacco products, although the only ingredient both products have in common is nicotine; this is a moot point, however, as vape companies have begun to produce synthetic nicotine. This means that vape products will be taxed in California as well, although the exact tax on the products is yet to be known, even though the implementation of the law is less than a week away.
States are having difficulty learning how to tax vape products as the only part of the vape process that has nicotine is the vape liquid, and these are sold in milliliter bottles, not in packs. Therefore, the tax increase on traditional cigarette packs cannot be placed on vape products; the $2 tax on packs can’t be transferred to 30 ml or 60 ml bottles of liquid, and so a new approach must be implemented.
So far, most states have refused to have taxes on vape products until more research can be done on how to tax it appropriately. Some states, like Pennsylvania, have decided on a wholesale tax of 40 percent which has effectively bankrupted the industry in that state and left the budget short of that revenue windfall. Other states have instituted high taxes on vape products, leading to public uproar and vape companies moving across state lines to avoid the tax.
Fortunately for many vapers, online sales of vape products are flourishing. This is because online sales rarely include the tax of the state, meaning more vapers are looking for online solutions to their problems. Online stores also generally have lower prices overall on their stock because they don’t have physical locations, ensuring that vapers who are looking for liquids and products can always find them cheaper online than in their local neighborhood.
It’s also important to note that vapers have an option that traditional smokers don’t: they can buy vape liquid worldwide online that is not taxed or has nominal excise taxes from the country of origin. Traditional smokers do not have this option as countries worldwide, including those in the European Union, either don’t sell cigarettes online or have high taxes plus shipping for their products.
Even with the tax hike in California that also taxes vaping, this market’s consumers have cheaper and more affordable options than traditional smokers. In fact, even if the vape tax is high in California, vapers will spend, on average, less than a smoker on their products within a calendar year.
Cigarette use across the nation is declining, and the recent tax hikes in the country are set to reduce the volume sold by at least one percent. For smokers who are actively trying to quit the habit, vaping is becoming an increasingly affordable alternative for them. As more is learned about vaping and its ability to act as a smoking cessation method becomes more clear, it is hoped that the taxation issue will be put to rest, allowing traditional smokers to not only save their lives but save a little money too.