Cigar Aficionado

A Taxing Situation

I’m back in the office after a few days in Charleston, South Carolina, at the annual Cigar Association of America meeting. This is a gathering where some of the nation’s biggest cigar makers discuss the issues of the day, and this year no issue loomed larger than SCHIP.

SCHIP stands for State Children’s Health Insurance Program, and it’s been the hot topic in the cigar industry since the summer. Some members of Congress wish to expand the program by $35 billion, and the funds for that expansion would come from higher tobacco taxes, including an increase in the federal excise tax on large cigars. The rate change, going from 20.7 percent of the manufacturers’ selling price to 52.988 percent, is the minor issue: the big problem is the limit on that tax. Currently it’s capped at 5 cents. This bill would have it rise to $3.

The bill passed Congress, but President Bush vetoed the legislation on October 3. So we’re out of the woods, right? Not quite. On Thursday, October 18, Congress will make a push to overturn the veto. They have the votes in the Senate, but not the House, so some are lobbying to sway the minds of their fellow politicians.

Most of America’s mass-market cigar producers were at the CAA show, with a few premium cigarmakers. SCHIP is weighing heavily on their minds. “We’ll be drinking on Thursday,” said one young cigar executive. “Good stuff if the veto holds, cheap stuff if it doesn’t.”

This is a big week for cigar smokers. If the veto is overturned, the tax rate would change on January 1st. Your cigars would become considerably more expensive.

How expensive? Here’s an unscientific calculation: The suggested retail price (SRP) of most cigars is twice the wholesale price, which is the price many (but not all) manufacturers sell at. So taking that assumption, let’s look at a few cigars from the Corona Gorda section of the October Cigar Aficionado:

The Coronado by La Flor Corona Especial has an SRP of $7. Assuming a manufacturers’ selling price of $3.50, under current law the federal excise tax on that cigar would be five cents (20.7 percent of $3.50 is 72 cents, but the cap is at 5 cents.) SCHIP would change that tax to $1.85. (52.988 percent of $3.50 is $1.85, still under the $3 cap.) The Fuente Fuente OpusX Fuente Fuente has an SRP of $9.50. Assuming a manufacturers’ selling price of $4.75, the federal tax would go from 5 cents under current law to $2.51.

Two of the cigars in that tasting category, the Diamond Crown Robusto ($14 SRP) and the Zino Platinum Scepter Series Grand Master ($13) would reach the $3 tax cap. The least expensive cigar in the category, the $4 Arturo Fuente Flor Fina 8-5-8 Maduro, would have an estimated tax of $1.06.

There’s no denying these are huge increases: for the 8-5-8 smoker, your tax would go from five cents to $1.06, a 21-fold increase. For those smoking the more pricey smokes, the tax would rise 60-fold.

An additional $1 to $3 more per cigar in federal taxes on every cigar you smoke, $25 to $75 more for every box. That’s quite a bit of money. Here’s the question: should the veto get overturned on Thursday and the tax rate spikes, how would it affect your buying habits?

"If taxes were to increase at the proposed rate, I think many of us would be less likely to try new products just for the sake of trying something new. People will stick to brands that have a proven track record of delivering a consistent quality. In fact, I think we'll see the industry slow down in terms of new product introductions, while startup brands will be harder to get off the ground. Naturally, I think we'll see demand increase for "value" brands in the $3-$5 range. At the same time, I don't think you'll see the tax affect luxury brands like Davidoff in the $20-$30 range. What's the difference if you're paying $30 for a Double R or $33? It's the "mid-priced" brands that I think will suffer most, those in the $7-$10 range. I, for one, will be smoking less but smoking better. I think many others, though, will look at a garden variety Fuente that all of a sudden sells for $8 or $9 and say, wait a minute, I'm better off taking a risk and buying some Cuban cigars for the same price. So, in the end, you'll have less funding for SCHIP because people will be buying fewer domestically-available cigars…and a certain sect won't be paying any taxes at all because who pays taxes on illegal products anyway? Another brilliant plan by our lawmakers. " —October 15, 2007 15:52 PM
"The new SCHIP bill is bad policy period and shouldn't become law. It is flawed because it will offer free insurance to some children whose parents make $65k a year! Throw in the draconian cigar tax and you have a real loser.But who can debate against doing something "for the children?" Vote against it and it will be used ad nasusem against the incumbent at election time. "He/She doesn't care about our children." " —October 16, 2007 11:53 AM
"Interesting comment, especially regarding the Cuban cigar situation." —October 16, 2007 10:09 AM