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Cigar News: Proposed Pennsylvania Cigar Tax Hike Could Have Nationwide Impact

19 May 2015

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Pennsylvania holds unique influence in the premium cigar industry. Not because cigar tobacco is grown in the state; a small amount is, but not nearly as much as Connecticut. Nor is it because some cigar makers are there; there are many more based in Florida.

What makes Pennsylvania such an important state in the American cigar industry is taxes. Or, more specifically, the lack of cigar taxes.

Along with Florida, Pennsylvania is the only state with no state excise tax on cigars (PDF). But in the budget submitted by Democratic Governor Tom Wolf for fiscal year 2015-2016, cigars would be taxed at a rate of 40% of wholesale value.

This would be a huge hit to the Pennsylvania cigar industry that has grown because of the lack of cigar-specific taxes. (The companies, its employees, and owners, of course, pay plenty of other taxes to the state because of the jobs cigar retailers provide.) Many of the largest online and catalog retailers, including Cigars International (including Cigar.com and Cigarbid.com), Famous Smoke Shop (including its Cigar Auctioneer site), Holt’s, and Atlantic Cigar, have grown in the state for that reason.

While the Republican-controlled state legislature makes adoption of the proposed budget in its entirety unlikely, there is still a chance the tax, or perhaps a lower “compromise” tax, on cigars and other tobacco products could be included in the budget. That threat is significant enough that the IPCPR issued an Action Alert on the issue late last week.

Cigar smokers in the state can contact their state legislators using the IPCPR form.

Analysis

Pennsylvania’s zero tax rate on handmade cigars has made it a magnet for cigar retailers. This has in turn impacted the way cigars are sold and taxed in other states in ways that benefit both retailers and consumers.

The low prices often charged by Pennsylvania (and Florida) retailers who don’t have to pay taxes benefit consumers everywhere by creating pressure on all retailers to keep their prices as competitive as possible. Of course, buying a cigar online means losing out on the personal touch and sense of community that only a brick-and-mortar store can provide. Even so, the competition can make cigars bought in shops more affordable (they don’t want to lose your business to an online operation) even if the prices don’t line up exactly with the sometimes lower price a high-volume online operation can charge.

While local retailers may sometimes resent the competition from online discounters, the truth is they too benefit greatly from lower tax rates elsewhere. Far too often legislators turn to tobacco as an easy target for raising revenue. The simple economics of higher taxes driving purchases to untaxed retailers in other states, however, can undermine the revenue-raising potential of higher taxes on cigars.

In other words, even if you only purchase your cigars from your local cigar shops, increased tax rates in Pennsylvania will, over time, make your cigars more expensive. For that reason, all American cigar smokers should be worried about efforts to raise cigar tax rates in the Keystone State.

Patrick S

photo credit: Flickr

Drew Estate

7 Responses to “Cigar News: Proposed Pennsylvania Cigar Tax Hike Could Have Nationwide Impact”

  1. Reggie Tuesday, May 19, 2015 at 8:28 am #

    I always wondered why all the online shops seemed to be based in PA. Shame on me for never putting two and two together. Makes perfect sense now.

    By the way, doesn’t the PA governor threaten cigar taxes almost every budget cycle? Haven’t we need this before? I seem to recall the CEO of one of these retailers threatening to move to FL awhile back…

  2. Mike Tuesday, May 19, 2015 at 10:12 am #

    As Reggie noted, PA governors of both parties have targeted cigars for taxes of varying levels for years. Fortunately, the cigar industry has friends in both parties and I am always skeptical a tax goes through.

    I must disagree with Patrick’s assessment that the low tobacco taxes of FL and PA keep prices down elsewhere. I have visited many brick-and-mortar tobacconists around the country who charge far more than what their state/local taxes should justify. Many curse online retailers as being able to sell products for much less than the wholesale rate in their state. It has no effect on their prices.

    • The Stogie Guys Tuesday, May 19, 2015 at 3:25 pm #

      There are certainly many shops who charge a lot for their cigars (above MSRP even factoring taxes), but still as much as they dislike the competition, they have to factor in the low prices online in their pricing strategy. It doesn’t mean they try and compete completely on price, but unless they just don’t care about running their business at a profit, the reality (that they must know) is that pushing prices too high can cause them to lose customers to other retailers. And with the internet those retailers can now be anywhere in the country so geography offers little protection.

  3. Mark Thursday, May 21, 2015 at 7:20 pm #

    A new cigar store just opened in my town and although I would love to support the local businesses, their prices are at least 30% higher than the catalog stores you mention above. I will be buying my cigars there and hope this new store is still around a year from now.

  4. jerry Friday, May 22, 2015 at 12:33 am #

    We need a flat tobacco tax for all states this will stop all the tax cheating in the United states.
    Jerry

  5. albert ross Saturday, May 30, 2015 at 4:12 pm #

    If my government needs my money for infrastructure and education I have no problem with that.

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    […] cigar smokers nationwide—at least until a new cigar tax is proposed in the Keystone State. As we reported in May, “Pennsylvania’s zero tax rate on handmade cigars has made it a magnet for cigar […]