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Cigar tax proposal threatens US retailers, Latin American countries

WASHINGTON (Thomson Financial) - US specialty tobacco shops are worried that a proposed increase in federal taxes on cigars will drive thousands of small retailers out of business, and could also lead to substantial job losses in Latin American countries that produce and export most cigars sold in the US.

At issue is a bill approved last week by the House tax writing committee that would dramatically increase taxes on cigars, cigarettes and other tobacco products in order to pay for increased funding for a nation-wide children's health insurance program.

The House Ways and Means Committee approved a bill Thursday that would more than double taxes on large cigars, most of which are premium cigars, to 44.6 pct, up from the current level of 20.7 pct.

The House bill was approved in committee a week after the Senate indicated it could support a 53 pct tax on large cuban cigars.

Chris McCalla, legislative director for the Retail Tobacco Dealers of America, said the taxes being considered could force premium cigar prices in the US to double or even triple, since the tax would apply every time a cigar changes hands at the import, distribution and retail levels. As one example, he said a 4 usd cigar could cost as much as 12 usd under the new tax.

McCalla said the tax would likely drive a large percentage of the 3,600 specialty tobacco retailers in the US out of business, since he does not expect consumers to pay this steep price.

'If this happens, expect a great number of these family-owned cigar shops to close,' he said of the legislation. McCalla's group includes about 2,000 small retailers as members.

Another potential problem is that the Senate bill would require the new tax to be assessed immediately on all cigar inventories maintained by tobacco shops once the law takes effect, leading to a huge one-time charge that could prompt some stores to close before taking the tax hit.

Internationally, industry sources said they expect a shrinking number of US tobacco retail outlets to lead to reduced US imports of cigars from Latin American countries.

'This would have a devastating impact on Nicaragua, Honduras and the Dominican Republic, which have tens of thousands of people working in the tobacco industry,' said Norman Sharp, president of the Cigar Association of America.

Ironically, Ways and Means Committee Chairman Charles Rangel of New York supports the bill, even though he has previously championed efforts to ensure Latin American countries have fair access to the US market. Rangel indicated last week that he was reluctant to support the tax hike, but the bill was approved by his committee nevertheless.

'I have a history of opposition to excise taxes, but in light of the heavy financial weight smokers place on Medicare expenditures and the overwhelming proof linking the increase in cost of tobacco products with a decrease in youngsters buying cigarettes, I am very pleased to have worked with my colleagues on the bill we are reviewing today,' he said.

The House bill as approved would also more than double taxes on cigarettes and other products like chewing tobacco. Taxes on cigarettes would account for most of the revenues generated by the tobacco tax hike.

Cigarette producer RJ Reynolds has already publicly called on Congress to reject a tax hike on cigarettes, while other companies such as Philip Morris USA and Loews Corporation (nyse: LTR - news - people ) are also known to oppose the tax hike. One industry source said it is widely expected that a tax increase on tobacco would reduce consumption of cigarettes in the US.

'Between federal, state, and local taxes and tobacco settlement payments, government entities raked in more than 33 bln usd from smokers in 2006,' according to a notice on RJ Reynolds' website. 'Why should 20 pct of the adult population be forced to pay even more?'

Thursday, August 30, 2007

Source: Forbes.Com

Cigar tax proposal threatens US retailers, Latin American countries