Diary

The Ridiculous Cigar Tax and it’s Economic Impact

The following composition is an essay that I comnpleted for my Economic Theory class at UOP. I am trying to bring awareness to this issue and the economic implications. Please feel free to share your thoughts. Taxation of the Cigar IndustrySeth M. Rosen Axia College / ECO 205Professor Elnora Farmer August 17, 2008

Taxation of the Cigar Industry

 Increased taxation of the cigar industry is a controversial issue in America today. Repeatedly, elected officials in Washington D.C. have attempted to increase the taxation of cigars, which if imposed on the consumer, would cripple the international cigar industry. Consequently, the economic and immigration fallout from an increase in taxes on cigars would spell disaster for the United States of America. During a conversation I had with a cigar industry pioneer, Sal Fontana, he stated “if the 20% tax increase on cigars were implemented there would be about 90,000 people out of work” (Sal Fontana, 2008). The international political fallout from destroying another countries economy, by imposing a ridiculous tax increase here in the United States of America, would deliver a detrimental blow to countries like the Dominican Republic, Nicaragua, and Honduras. The economies of these Latin-American countries depend on the profitability of the tobacco plantations within their respective countries. The increase in taxation of cigars for American consumers in not only detrimental to the foreign countries producing the tobacco but the local cigar and tobacco shops across America. Therefore; the proposed increased taxation of cigars would cause a rise in unemployment on a global scale.

The Imposition of the Cigar Tax

 The taxes that are paid on cigars are levied on the consumer. Every time a consumer purchases a cigar, the tax is added to the purchase price. In some states, like California, there is a state tax as well as an existing federal tax on cigars. The money that would be generated by the proposed twenty percent tax increase would subsidize The State Children’s Health Insurance Program, commonly referred to as SCHIP. “The State Children's Health Insurance Program (SCHIP) is a U.S. federal government program that gives funds to states in order to provide health insurance to families with children. The program was designed to cover uninsured children in families with incomes that are modest but too high to qualify for Medicaid. SCHIP was created in 1997 and initially authorized for 10 years. SCHIP was to expire in September 2007. So, in July 2007, the U.S. Senate and Congress tried to not only reauthorize SCHIP but also expand SCHIP by $35 billion by proposing a 20,000% increase in the federal excise tax on cigars and $0.61 tax increase on pack of cigarettes. After President Bush's first veto, the U.S. Senate and Congress modified the tax increase on cigars to 6,000% but the revised expansion of SCHIP was vetoed again by President Bush. Unfortunately, the SCHIP debate is not dead yet” (Cigar Rights of America, 2008, para. 7 & 8). The sale and distribution of cigars and the healthcare of children are not related issues. Children do not smoke cigars and cigar manufacturers do not market their products to children.

How the Cigar Tax Would Affect Supply and Demand

 If the proposed twenty percent tax increase on cigars were implemented many cigar stores across the United States would go out of business. The demand for cigars would go down because many consumers would not be able to afford the higher prices caused by a twenty percent tax increase. Cigar manufacturers would be forced to produce less tobacco because of a decrease in demand. This decrease in production would result in unemployment rates in Latin-American Countries to rise. Furthermore; charities like the Cigar Family Charitable Foundation would be detrimentally impacted along with the communities that benefit from their services. Elected officials in the United States must consider the international ramifications that a significant cigar tax increase could have. The following quote gives an appropriate example of the type of impact a ridiculous tax increase on cigars can cause. “Some history: Oregon was first to substitute the 30% wholesale tax with a 50¢ tax, not to exceed 50 cents (capped), on cigars worth more than 77 cents manufacturer's suggested retail price (MSRP). Then Washington followed suit. In Rhode Island's example, a $5 MSRP cigar previously carried a tax of $2 (30%), increasing its MSRP to $7. The 50 cent cap cut the price to $5.50, a $1.50 savings. A 25-cigar box dropped from $175 pre-tax to $137.50. "Smokers also didn't have to pay shipping, wait for their order, or solve problems long distance," says Joyal. "Now, we're on a more level playing field with the big mail-order houses in low- and no-tax states. Based on Oregon's results, we believed most smokers preferred the ambience of a tobacconist, and would pay a fair tax” (Scott, 2006, para. 4).

Equilibrium Price and Quantity

 The equilibrium price of cigars would be adversely affected by a tax increase on cigars. Cigars are a luxury item that can cost in excess of thirty dollars a cigar. However; there are the more mainstream cigars that cost anywhere from two dollars to fifteen dollars. The quantity demanded for cigars would significantly decrease causing the quantity supplied to fall out of balance. Therefore; the existing equilibrium price of cigars would no longer exist if a significant tax increase took place. The equilibrium quantity would decrease because many consumers would stop buying cigars because the affordability would go down. Overall; the decrease and imbalance of the equilibrium price would cause a negative shift in the equilibrium quantity which would adversely affect cigar stores throughout the United States of America.

Imposing a Price Ceiling

 The imposition of a price ceiling on cigars would have many adverse affects on the cigar industry. Here is a scenario; the United States Government decides that they will impose a twenty percent tax increase on cigars. As a result of this increase the various cigar manufacturers in the Dominican Republic must layoff employees, reduce production, and raise prices for their products. Then when the cigars make the journey to the United States and a consumer sees the five dollar cigar is now eight dollars, the likelihood of that consumer purchasing that cigar diminishes significantly. Due to the decrease in purchases at local cigar stores, the proprietors of theses stores may implement cut backs. Even worse, some cigar stores may go out of business because daily operational expenses on top of a tax increase are simply too expensive. As a result of all these variables unemployment will increase, the United States and Latin-American economies will be adversely affected, and the United States Government will have succeeded in infringing on the rights of cigar smokers.

References

Cigar Rights of America. (2008). The Issues. Retrieved August 17, 2008,
from http://www.cigarrights.org/issue.htm

Sal Fontana. (2008). Personal Communication at the Smoke Inn of West Palm Beach, Florida

Scott D. (2006). Capping Cigar Taxes. Smokeshopmag.com
Retrieved August 17, 2008, from http://www.smokeshopmag.com/0806/taxation.htm