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Potential removal of tobacco excise tax hike seen as win for manufacturers

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The apparent removal of a proposed major increase in the tobacco excise tax from the Biden administration’s economic proposal is viewed by analysts as “unequivocally positive” for the industry as a whole.

Barclays analyst Jain Gaurav cautioned, however, in a note to investors Tuesday that an excise-tax increase could be resubmitted.

That happened Wednesday when an amendment to the Build Back Better Act reintroduced a tax on vaping products, but not on traditional cigarettes.

"American voters are already livid with paying high prices at the pump and the grocery store," Amanda Wheeler, president of the American Vapor Manufacturers Association, said in a statement.

"It’s a certainty they will be outraged with a gigantic tax on a product that millions use to quit cigarettes."

Gaurav noted that as “the size of the Build Back Better plan has reduced from $3.5 trillion to the currently proposed $1.5 trillion to $2 trillion, we were expecting a reduction in all the proposed tax hikes, including tobacco taxes.”

“We were, however, not expecting a complete drop of the planned tobacco tax hikes.”

The excise-tax hike proposals are similar to those included in a Democratic-sponsored bill introduced in September in the U.S. Senate.

The “Tobacco Tax Equity Act” wouldn’t only double the federal tax on traditional cigarettes. The main design is to raise the federal excise tax on all other tobacco products to equate to the proposed $2.01 per pack on traditional cigarettes.

“The increase could raise $112 billion over the 10-year budget window,” according to The Tax Foundation.

The Biden proposal raises the per pack excise tax to $2.02.

Gaurav said that while top-selling Marlboro would have experienced about a 14% price increase, and No. 2-selling Newport by 12%, deep-discount cigarette prices could have risen by up to 30%.

The Biden proposal would have raised the prices of moist snuff by about 50%, as well as electronic cigarettes by 40% to 50%.

“Coming at the same time as the FDA tightens its e-cig regulation through the premarket tobacco application process, this would have implied continued declines in e-cigarettes and other smokeless tobacco and nicotine products.

“That could continue to benefit traditional cigarette volumes, as it did in fiscal 2020,” Gaurav said.

“This would have implied a one-time impact of minus 5% on U.S. cigarette volumes for British American Tobacco and Altria Group Inc., over and above the structural volume decline historically at minus 3% to minus 4%.”

Gaurav said it’s likely the major tobacco manufacturers would have been successful in passing along the excise tax increase through list-price increase to vendors, and eventually to smokers.

“We think the industry could pass on a 15% hike like it did in 2009 when the federal excise tax was last increased,” Gaurav said.

“However, the equalization of taxes across categories would have led to structural volume declines improving in cigarettes ... It could have led to some volume from other categories, such as e-cigarettes, coming back to cigarettes.”

Gaurav said the debate around the tobacco tax proposals of these bills “clearly demonstrate that the U.S. tobacco industry has an important ally in convenience store operators.”

“For smaller convenience stores, tobacco sales can account for 10& to 25% of sales, especially as larger chains have stepped away.

“As investors grapple with future potential regulation around U.S. tobacco, such as menthol cigarette ban and nicotine caps, this is an important aspect to keep in mind.”

Gaurav’s conclusions were not surprising to David Sweanor, an adjunct law professor at the University of Ottawa and the author of several e-cigarette and health studies.

“There is a long history in this field of choosing policy options that are far harder to achieve than far more effective alternatives,” Sweanor said.

The Tax Foundation, in review the U.S. Senate bill, said that “a large portion of the new tax burden would fall on low-income Americans, as consumption of tobacco is more common in this group.”

The foundation also cited claims from pro-vaping public health advocates who say creating tax parity “between the most harmful tobacco products and least harmful nicotine products would hurt smokers’ ability to switch from cigarettes, which is a problem for public health.”

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@rcraverWSJ

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