Big Tax Hike Stuns Buyers of Snuff, Chew
Parm Bains, the owner of a truck stop on California 99 south of Yuba City, used to sell 100 hockey-puck-sized containers of Copenhagen and Skoal chewing tobacco a week. Now he’s lucky to sell 10. Since July 1, he has heard customers vow to quit chewing, and he has seen good ol’ boys switch from Red Man tobacco to Extra sugar-free gum.
Their conversion reflects neither health concerns nor changing tastes. It’s about cash.
A swift surprise decision by the state Board of Equalization last month brought about a dramatic tax hike on chewing tobacco and snuff. The board’s action unhitched the smokeless-tobacco tax from a 12-year-old formula that had set the rate at an average 38% of the wholesale price. Under the new regulation, the products are taxed according to weight, and the retail price on some products has increased as much as 290%.
In some stores, a 3-ounce bag of Red Man brand chewing tobacco that last month cost $4 now goes for more than $10.
The new tax was imposed despite opposition from an unlikely confederation of tobacco lobbyists, the American Heart Assn. and entertainer Rob Reiner, the main proponent of a recent initiative that raised cigarette taxes by 50 cents per pack.
Board of Equalization member Johan Klehs, preparing to mount a statewide campaign for controller, pushed for the tax hike, while Dean Andal, another board member also running for controller, voted against it.
The result: On July 1, nine days after a divided board voted 3 to 2 to adopt the tax rate, tobacco chewers were stunned by a dramatic uptick in the price of their product.
“We haven’t sold one” bag of Red Man since the tax went into effect, Bains said. Some customers were so furious, he added, that they hurled pouches of tobacco back across his counter after hearing the new price.
Klehs, a Democratic board member from the Bay Area who led the charge for the new tax, said his action was an attempt to slash, in the service of public health, at least a third of the 100 million ounces of smokeless tobacco sold in California every year. Supporters say the tax will deliver an extra $67 million annually at a time when money from other sources is falling short of expectations. But critics call the tax political grandstanding, and say it will never survive the barrage of tobacco company-backed lawsuits that almost certainly are coming. Opponents also contend that the tax will lead to a thriving underground racket in snuff and chewing tobacco, cheating the state of any revenue at all.
The most popular type of smokeless tobacco, moist snuff, such as Copenhagen or Skoal, now costs around $8, up from about $3. Dry snuff, tobacco dust inhaled through the nose, already a nearly extinct habit in California, doubled in price.
Andal, a Republican board member from Stockton who opposed the tax hike, said he fears the new levy could bring in less money than the old method.
“We had a rate we could credibly collect, but now we could very well collect less tax,” Andal said. “The board majority rewrote the law rather than enforce it.”
Andal has cast key votes against tobacco, breaking from fellow Republicans in 1993 and 1994 to vote for a ban on smoking in restaurants and other public places during his tenure in the Legislature. But in a state where fewer than 20% of the people smoke, and where antitobacco attitudes run deep, Klehs may have found an issue to use against Andal.
Kleh’s action singles out a product that is not widely used by voting adults. The California Department of Public Health Services estimates that less than 2% of adult males chew tobacco. The percentage of women who indulge in the habit is virtually zero, officials say.
But Kleh’s attack on chewing tobacco surprisingly has run afoul of some of tobacco’s most reliable opponents.
During two Board of Equalization meetings in May, lobbyists for the American Lung Assn. and Reiner himself found themselves in league with their longtime rivals, lobbyists and lawyers for the tobacco industry.
“We saw that making this change would bring no positive change for the state,” said Lisa Rea, a lobbyist for the American Heart Assn.
Rea urged keeping the tax at its present level, and she was joined by the board’s Excise Tax Division chief, Dennis Maciel, who recommended that the board not vote for the new tax because of the threat of lawsuits.
“We fully expect a legal challenge,” Maciel said. “What it will be based on, we don’t know.”
Klehs said he is confident that the tax will survive any court challenge and that the board’s investigation division will thwart large-scale smuggling encouraged by the higher levy. Still, some insiders worry that smuggling will be an issue.
Monte Williams, chief of the board’s investigations division, said the new tax prompted him to request 24 new officers devoted to tobacco smuggling. If the Legislature doesn’t approve the extra staff, Williams said, keeping on top of the expected spike in black market smokeless tobacco is “going to be tough.”
As the two sides of the tax debate consider their next moves, Rea and others noted that there is irony in the current situation for the tobacco companies. It was the maker of premium moist snuff brands Copenhagen and Skoal that initially lobbied for a change in state law regarding its products. The company wanted to have the smokeless tobacco tax founded on weight and not wholesale cost, experts said, because that would give it an advantage over low-cost competitors whose products are lighter.
When the board chose the route it did, however, tobacco companies were taken aback.
Mike Bazinet, a spokesman for the Connecticut-based United States Tobacco Co., the nation’s largest producer of smokeless tobacco with its Copenhagen and Skoal brands, said the tax board’s decision caught his company off guard and was not what the company wanted when it set out to get the tax system changed.
“We are reviewing all our options,” he said. “There is a strong likelihood we will take legal action.”
