Biggest U.S. tax hike on tobacco takes effect

— -- Smokers are gasping at higher cigarette and cigar prices as the largest federal tobacco tax increase in history takes effect.

"Oh my gosh," Bernardo Torres said Tuesday when a clerk at a CVS Pharmacy in Falls Church, Va., told him the new price, which went up in anticipation of the tax increase. Torres wanted to buy his aunt two cartons of cigarette-size cigars, but he walked away empty-handed after hearing the new price: $134. The tax on little cigars went from 4 cents to $1.01 a pack.

"I don't know what to do. This is going to hit her hard," Torres said of his disabled aunt, 64, a heavy smoker who won't quit.

"I'm going to quit," said Will Hues, 27, smoking a cigarette outside the store. He said prices have gone up so much that "you're out of your mind to pay it."

The increases, which raise the federal cigarette tax from 39 cents a pack to $1.01, applies to all tobacco products. It comes as more than two dozen states, desperate for revenue in a sunken economy, consider boosting their own tobacco taxes this year.

"This is very historic," said Matthew McKenna, director of the Office of Smoking and Health at the Centers for Disease Control and Prevention.

Before the tax hike, cigarette prices averaged about $5 a pack. Now, tobacco companies are raising prices by different amounts. Some are absorbing part of the increase; others are raising prices more.

In the past, a 10% price increase reduced cigarette consumption about 4%, McKenna said. He expects the federal tax hike to prompt at least 1 million of the 45 million adult smokers to kick the habit.

"We expect this to accelerate the decline" in cigarette consumption, said Bill Phelps, spokesman for Philip Morris USA, the nation's largest tobacco company. He said consumption has been dropping 3% annually for a decade. "Some people may quit smoking," he said. "Others may cut back."

Nik Modi, a tobacco industry analyst at UBS, expects cigarette consumption to drop by about 9% annually. Tobacco companies won't be badly hurt, he said, because they've prepared for the increase.