19 May 2015
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.
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.
photo credit: Flickr