Tax Threatens to Extinguish Cigar Sales

In Washington D.C., the scene at J.R.Cigar meets expectations: businessmen smoking stogies on their lunch breaks, an employee wheeling a cart over to a customer lighting up a Don Diego, the lingering scent of cigars permeating the air, light music playing in the background ...

But it's a scene that may change if a newly signed House bill that threatens to hike the price of cigars by doubling the tax on premium cigars -- from 20.7 percent to almost 45 percent -- becomes law.

Currently, the federal cap on cigar tax is nearly 5 cents, but it could well go as high as $10 dollars a stogie if the bill clears its next hurdle in the Senate Finance Committee this week. The increased proposal would use the increase to fund an expansion of the Children's Health Insurance Program.

Committee figures calculate the average tax on a premium cigar would be $1, while mass-marketed cigars would be about 16 cents.

Rep. Eric Cantor, R-Va., told the Richmond Times-Dispatch he's against the bill.

Cantor said he is "absolutely opposed to raising taxes to pay for the huge expansion of the . . . program." Cantor cited that an increase in the tobacco tax may hurt job creation in his district, which includes the headquarters of Philip Morris, a major cigarette maker, also, unsurprisingly, opposed to a tax boost on cigarettes.

A Good Day for Health Advocates

It's no surprise that the American Lung Association stands in support of the bill for cigar and cigarette tax.

The group's national advocacy director Erika Sward said, "We think it'll be a win-win for public health all around."

Sward predicts the end result of the tax will be fewer youngsters who can afford to smoke and more adults with a financial incentive to quit. "Historically, we know that the data around cigarette taxes, and the cigar tax, federally, have been undertaxed," she said. "To put a cap on the tax makes the proposal quite reasonable."

An Industry up in Smoke?

Lew Rothman, CEO of J.R. Cigar, said the cigar industry and the stores it supports will not survive this tax.

"The few companies that manufacture the 12 or 13 or 14 cigar stores will survive, but the small companies will go out of business," Rothman said.

"Essentially what's going to happen is there are hundreds of thousands of people involved in making cigars, and if this tax is put into place the growers will stop growing tobacco and a massive number of people will become unemployed and the factories will have to lay off workers," he said.

Unlike cigarettes that are mass-produced, cigars are produced by hand.

Rothman explained that from the growing of the tobacco to the rolling of the leaves, each cigar is handcrafted over a two- to three-year period. With a cigar tax, he predicts that on top of the loss of jobs in the United States, half-a-million people in Latin America that produce cigars will lose their jobs.

The tax will affect retail sales, said Rothman, who estimated the "cigar price will double or triple."

Rothman argued that fewer and fewer people will be buying cigars, and that the body of cigar purchasers that lawmakers will be looking to tax will diminish considerably.

Taxing a Declining Pool of Purchasers

Rothman doesn't believe that a tax on cigars would help fund the health care program. "Congress is predicting revenue from this tax," he said. "If cigar taxes decline and health care increases, how can they base some ongoing plan on an industry that is going to decline?"

J.R. Cigar is bracing for the bill by cutting its 8,000-piece inventory in half.

The CEO said he doesn't believe legislators understand the ramifications of either the projected tax on the wholesale or the floor tax.

Rothman fears the disappearance of his business. "It's almost like being a bartender. You get to talk to everybody in the store," he said. "I even like to sit behind the counter myself sometimes."

Unless it can muster up the votes to override the president's veto pen, Bush has already vowed to veto the bill, arguing that funding for the Children's Health Insurance program can be wrangled from other sources without harming private businesses.