Cigarette sales fall sharply after tax - Smokers just cross borders, dealers say

from argus leader

By Terry Woster
twoster@midco.net
Published: February 23, 2007

PIERRE - Cigarette sales have plunged in a range from 30 percent to 60 percent in South Dakota since the $1 a pack increase in the state tax went into effect at the start of the year, tobacco dealers say.

"Currently, our numbers are down upwards of 40 percent," Bill Bailey, general manager of ANCON Distributing in Rapid City, told the House Taxation Committee on Thursday.

Ron Olinger, a South Dakota Retailer Association lobbyist, said the drop for Casey's General Stores has been 45 percent to 50 percent since the tax increased.

"Those are real numbers," Olinger said.

The steepest drops have been in the southeast part of the state, where smokers have been driving across the border into Iowa and Nebraska for cheaper cigarettes.

Sen. Garry Moore, D-Yankton, whose business includes cigarette sales, estimated that the drop in that area is 60 percent.

"That's phenomenal, the loss of business we can't recover," Moore said.

Proponents of the tax hike say it could be, at least in part, evidence the tax is working. A major benefit of raising cigarette prices is that, based on the experience of other states, some smokers are motivated by money to kick the habit.

Smoking is the leading cause of lung cancer and several other health problems.

But a state analyst and those in the industry say it's more likely evidence that some smokers stockpiled cigarettes before the tax increase went into effect and that others are driving to stores in nearby states to buy cheaper tobacco.

Michael Kenyon of the state Revenue Department said his agency predicted a 15 percent drop - based on calculations from the state Bureau of Finance and Management, which reviewed the experience in other states in making its projection. When measured later in the year, that could end up being an accurate estimate.

That's because, Kenyon said, sales typically drop severely in the first few months after a major tax increase; however, based on other states, sales tend to level off.

"Everybody knows the tobacco tax increase is coming, know they can store cigarettes in refrigerators or freezers for a while," he said. "Typically, you'll see a huge drop in consumption in the first three months, probably, after a big tobacco tax increase, and then things start to pick up. That's what happened in Minnesota. That's what happened in Montana."

The testimony came on a bill that would have scaled back a 3.5 percent discount the state allows cigarette distributors on the stamps that must be affixed to each pack of smokes. The discount is designed to repay the business for the cost of having to put tax stamps on the packs of cigarettes.

Kenyon supported a department bill that proposed to limit the discount to 2 percent. He said that with the tax tripling, the discount gives distributors a larger payment for each stamp.

"Our cigarette distributors got a windfall," he said. He said the process of putting the stamps on the cigarettes is unchanged - or down a bit, since sales are down - but "their compensation for doing it has almost tripled."

He said the stamp discount amounted to about $860,000 for distributors before the tax increase. If the 3.5 percent rate remains, the discount would grow to $2.4 million. Scaling the discount back to 2 percent would mean about $1.4 million, he said.

Company representatives said there's no windfall involved. They said the cost of the stamps has tripled, too. John Job of ANCON in Bismarck, N.D., said a roll of stamps cost $15,900 before the tax change and now costs $45,900.

Bailey said companies must pay the state when they get their stamps but often wait a month to collect back from their customers.

The committee voted 10-4 to kill the bill.

Reach Terry Woster at 605-224-2760.