Tobacco tax hike may burn local shops

East Valley tobacco shop owners fear that a new tax hike on their merchandise may cause sales to go up in smoke.

Beginning April 1, the federal excise tax will be raised on tobacco products to support President Barack Obama’s recently signed State Children’s Health Insurance Program (SCHIP). Retailers see the move as a business killer at a time when consumers are reining in discretionary spending and the number of smokers is in rapid decline.

The tax increases are considerable, shop owners said.

Tax on a pound of roll-your-own tobacco will go from $1.10 cents to $24.78 — about a 2,200-percent increase. Large cigars jump from 5 to 40 cents. And a pack of cigarettes spikes from 39 cents to $1.01.

The pain doesn’t stop there. In expectation of declining revenues, the major cigarette companies raised their wholesale prices in February. All told, Marlboros or Camels will cost about $7 a pack.

The hefty price tags will likely trigger sticker shock among customers. Five years ago, cigarettes sold for about half the cost.

“We’re expecting to lose some business,” said Mark Jakubowski, director of operations for Mesa-based DJ’s Smoke Shop Inc., which has four locations in Mesa and Chandler.

It’s unfortunate, he said, because DJ’s sales were beginning to return to normalcy after taking a 12 percent dip, as a result of the economic downturn.

“Now the government throws this on us,” he said. “They’re just adding insult to injury.”

Jakubowski has a feeling that many smokers will buy online or visit Native American reservations to avoid Arizona’s $2 state tax. Some may visit Mexico and buy in bulk to avoid both federal and state taxes. If this happens, Jakubowski said, the government is hurting its own coffers, as well as tobacco retailers’ bottom lines.

DJ’s has been in the East Valley for 22 years. The company has about 30 employees and has often helped sponsor local events and causes, Jakubowski said. But if sales begin to slow, he’s going to have to make some cutbacks to keep the business afloat.

“I don’t want to make those kinds of changes,” he said. “For now, we’ll just reduce inventory and keep our fingers crossed.”

Jakubowski already has plans to curtail its stock of roll-your-own tobacco, due to the 2,200 percent jump. He expects demand to plummet.

One of his roll-your-own customers, Donald Wildermuth, 23, of Mesa, said he’s limiting his habit. Due to the recession, he’s gone from smoking about 20 cigarettes a day to around five.

With the upcoming tax increases, he expects to smoke even less.

“It’s ridiculous,” he said. “I’ve got to cut back if I want to pay the rent.”

Michael Schumacher, owner of Smoke N Stuff in Chandler, said the new tax will effectively destroy the roll-your-own segment of his business. It’s putting a new burden on his small shop, he said.

“People will undoubtedly be buying less,” he said, expecting his total business to decline between 15 and 20 percent

“These taxes really hit hard on a small shop like mine,” he said. “But there is no way around it. The government has done everything it can to hold back the industry.”

According to the U.S. Centers for Disease Control and Prevention, cigarette consumption in Arizona has steadily decreased since it began tracking the numbers in 1970.

Inversely, the average cost per pack has increased.

That’s not a coincidence, said Stephen Michael, director of the Arizona Smoker’s Helpline (ASHLine), a research-based service set up to help Arizonans stop smoking.

“Higher cost is a pretty big motivator to quit,” Michael said.

In Arizona, a smoker pays about $3,285 every year to smoke one and a half packs a day, according to the Arizona Department of Health Services. It’s going to run more than $3,800 after the tax increase. Michael said he hopes that the tax hike will urge people — who have recently reduced their tobacco use — to quit completely.

However, Michael does have his reservations about the new tax revenues going to support SCHIP. He said he’s wary that a program as big and important as SCHIP will have to rely on continued sales of tobacco. He said he believes that demand will drop.

This is an occasion where he and Jakubowski of DJ’s Smoke Shop agree. SCHIP funding relies on Congressional estimates, which predict that the increased tax will result in a 4 percent drop in overall consumption. That’s too low, Jakubowski said.

In fact, according to a recent study by The Heritage Foundation, a Washington, D.C.-based public policy institute, consumption needs to go up for SCHIP to be properly funded. The foundation estimates that Congress needs to produce more than 9 million new smokers in the next five years to pull in the appropriate funds.

“I don’t know where the government will turn when they need more money,” Jakubowski said. “The burden is likely to fall on everyone else. Not just tobacco.”

Impact of tax

 Source: National Association of Tobacco Outlets