Smokers and Retailers Stung by Price Hikes

When Laurie Beth Asadoor doesn’t have time for a 15-minute cigarette break, she sneaks outside work for a few quick drags. She used to leave the half-smoked butt for the street people who sift the downtown ashtrays.

No more. Asadoor, to save money, now carefully snuffs the cigarette’s flame and slips the cigarette back into the foil packet for next time. “I crush it out, make sure it’s not burning and walk back inside,” she said.

Her newfound frugality was sparked by the dramatic recent price increases levied on the state’s 4 million smokers. First came a 45-cent-per-pack manufacturers’ increase to help pay for a $246-billion settlement with states’ attorneys general. Then Proposition 10, a ballot initiative to increase tobacco taxes 50 cents per pack in California, passed by a razor-thin margin in November and took effect at the first of the year.

That was the day Asadoor went to pick up a pack of Marlboros at the Copper Lamp in Monrovia, a neighborhood store she frequents. When the cashier asked for $4 and change, “I thought the guy was joking,” she said.

For Asadoor and her 45 million fellow American smokers, the price shocks may not be over.

A jury in Portland, Ore., this past week ordered Philip Morris to pay $80 million in damages to plaintiffs in a lung cancer case. Last month, a San Francisco jury ordered the company to pay $45 million in damages in a health-related case. These awards alone may not be enough to affect cigarette prices, but should the trickle of defeats grow into a flood, tobacco firms would be expected to recoup legal costs through additional price hikes.

Although many smokers have resigned themselves to paying higher prices, some are seeking alternative sources to feed their addiction. Some are quitting. Small-business owners, especially cigar shop proprietors, are incensed by the increase, saying they are losing money as customers venture across state lines, out of the country, onto the Internet or into the black market to avoid the higher prices.

Proposition 10 not only raised state taxes on a pack of cigarettes from 37 cents to 87 cents, it also more than doubled the cigar tax. Sponsored by film director Rob Reiner, it is expected to generate $700 million for early-childhood development programs.

California’s tax is the third-highest in the nation, trailing only Alaska and Hawaii, where smokers are more geographically isolated. But here, smokers can cross into Arizona, Nevada or Oregon, where per-pack taxes are 58 cents, 35 cents and 68 cents, respectively. Or they can cross the border into Mexico, where a carton of American cigarettes sells for $11 to $15, compared with $30 to $35 in California.

“The government doesn’t realize that a lot of people just order out of state--they’re going to lose out on the [tax] money,” said Mike Erskine, owner of Ben’s Smokeshop on Hollywood Boulevard.

Sales have dropped about 10% at his shop since the beginning of the year, Erskine said. “It’s hard to judge it--a lot of people are just stocked up,” he added.

At Pete’s Smokeshop in Parker, Ariz., assistant manager Tia Laffoon said California smokers have been flocking to the border town every weekend since the increase. Pete’s is on the Colorado River Indian Reservation, a mile from the state line. Cartons of premium cigarettes there sell for $25.35, while generic brands cost $22.70 or less.

“We get two shipments in a week, and right after the weekend our shelves are bare,” Laffoon said.

Customers are in disbelief about “the California prices--they just can’t believe how much they’ve increased them and how many times they’ve increased them,” she said.

In addition to Proposition 10, other cigarette taxes include 10 cents for the state general fund; 2 cents for a breast cancer fund; and 25 cents for a tax imposed as a result of Proposition 99, passed in November 1988. Tacking on federal excise taxes and a state sales tax of 8.25% runs the price of a pack of premium cigarettes up to $4 or more now.

Small-business owners in California say voters were misled about who pays for Proposition 10.

“The ads kept talking about big tobacco,” said Carrie Aley, owner of Romeo et Juliette, a cigar shop in Seal Beach. “It’s not big tobacco--it’s a consumer tax and a small-business floor tax.”

After the initiative passed, Aley marked down cigars by 70% at her store, hoping to get rid of her stock. A sign outside read: “Liquidation Sale. Rob Reiner Taxed Me Out of Business.”

On Dec. 31, the shop closed.

“I spent five years building this business up,” Aley said. “Now it’s been trashed. It’s been ruined.”

Proposition 10 increased the tax on cigars from 26% to 61.5% of the selling price. Any merchandise that retailers had on hand Jan. 1 was subject to the higher tax. For some exclusive cigars, the tax increase could mean hundreds of dollars in additional taxes owed. Business owners such as Aley were expected to pay the taxes in anticipation of sales, or face a 10% penalty and 11% interest on Feb. 15.

“What they’ve done is jack the tax rate up so high that I can’t sell the product,” Aley said. “They want me to prepay in anticipation of sales that aren’t going to be in here. I’m never going to sell those cigars.”

A second Romeo shop in Newport Beach remains open, although Aley says she’s not sure how much longer she can hold out. “If I could get out of my lease and sell this stuff, I would be out of this business right now,” she said.

Smokers are no less passionate in their hatred of the new taxes. Michael Himbrick, senior vice president of the National Smokers Alliance, said the Proposition 10 tax is a form of “economic terrorism.”

“This can all be done because tobacco is an easy target,” he said.

But advocates of the ballot measure say that if the higher prices mean fewer smokers, everybody wins.

“We strongly supported the initiative in California,” said Daniel McGoldrick, director of research at the Campaign for Tobacco-Free Kids. “The basic law of economics is, if price goes up, consumption goes down.”

“We know that the evidence is pretty strong that a price increase is one of the most effective methods of reducing smoking, particularly among youth,” he said.

Proposition 99, which raised cigarette taxes by 25 cents a pack in 1988, reduced sales here by 819 million packs over a 2 1/2-year period, according to the American Journal of Public Health. Some of that tax money is used to finance a vigorous anti-smoking advertising campaign.

A National Cancer Institute study found that for every 10% increase in the cost of cigarettes, overall consumption decreases 3% to 5%. Among teenagers, a 10% price increase would reduce overall cigarette consumption by more than 13% and reduce the number of teenage smokers by nearly 7%, according to a study by the National Bureau of Economic Research, a nonprofit think tank in Cambridge, Mass.

“Kids tend to be more price-sensitive because they have less discretionary income. They may be less addicted because they haven’t smoked as much and their nonsmoking behavior affects their peers,” McGoldrick said.

Although Proposition 10’s impact on smoking rates will not be known for some time, early indications are that it is having an effect.

The California Smokers’ Helpline--a toll-free, state-funded hotline for smokers trying to quit--normally receives more calls during January than at other times of the year because of New Year’s resolutions. But this year, the line got about 2,500 calls, about 1,000 more than in January 1998, said outreach coordinator Judi Mills.

Many of the callers mentioned the higher prices as part of their motivation for quitting, Mills said.

Smokers object to price increases intended to modify the behavior of adults.

“The road to hell is paved with good intentions,” said Himbrick of the National Smokers Alliance.

Laurie Asadoor said she resents the government’s intrusion. “It’s a bad, dirty habit, but I choose to have a bad, dirty habit,” she said.

Many smokers have been prompted by the high prices to look for cheaper alternatives.

“A lot of the customers are into rolling their own [loose] tobacco. You can roll a carton [200 cigarettes] for $13,” Hollywood shop owner Erskine said.

“A lot of our customers are changing from premium to generic brands,” he added. “They just buy a lot less. They’re buying packs one at a time instead of cartons.”

Consumers are also venturing online to buy cigarettes from the countless Web sites that are based everywhere, from Virginia--which has the lowest state cigarette taxes in the nation at 2 cents a pack--to Indian reservations in New York state where there is no tax. At many Internet sites, even after shipping fees are added, a carton of cigarettes still costs at least $5 less than in California.

For example, an online mail-order business was opened in February by Politically Incorrect Cigar Shop & Lounge, which closed its doors in Westwood on Dec. 31 and moved to Carson City, Nev. Employees at several other tobacco Web sites said sales to California smokers have increased markedly since Jan. 1.

According to California law, residents can legally import two cartons of cigarettes per shipment from other states for “personal use” without paying state tax. For cigarettes from Mexico, federal law allows each U.S. resident to bring back one carton for personal use without paying federal tax.

Proposition 10 opponents claim cigarette smuggling from Mexico and other criminal activity will increase because of the tax. Last week, an armed gang backed a truck up to a warehouse in Corona and made off with an estimated $1 million worth of cigarettes.

“With the price differential, it’s ripe for a black market,” Himbrick said.

But it is far too early to gauge Proposition 10’s effect on black market activity, said Monte Williams, chief of the state Board of Equalization’s excise taxes division.

“The potential is there,” he said. “There was evasion of the taxes before--we estimate about $50 million a year since Prop. 99. How much that goes up, we have to wait and see.”

U.S. Customs agents, meantime, are seizing more cigarettes at the Mexican border crossings, said Vince Bond, a public affairs officer at the Southern California Customs Management Center in San Diego.

Although Bond declined to speculate on the reasons for the increase, he said, “It looks like we’re going to probably have a banner year in terms of the seizures of undeclared cigarettes.”