Feds give big tobacco new headache as California taxes proving hazardous to cigarette sales

Key Points
  • In April, California's cigarette excise tax jumped by $2 per pack, up from the previous 87-cent tax.
  • Since the tax hike, some independent retailers in the state are reporting consumer purchases of cigarettes down as much as 50 percent.
  • Revenues from the state's cigarette taxes plunged 64 percent in May from a year ago, perhaps a sign of earlier stockpiling by consumers ahead of the tripling of tobacco levies.
A shop owner sells a pack of cigarettes to a customer in San Francisco.
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Big Tobacco is feeling the sting not only from federal action but also from California tripling cigarette taxes in April, with some retailers indicating cigarette purchases are down as much as 50 percent.

On the federal front, the U.S. Food and Drug Administration on Friday indicated it plans to slash nicotine levels in cigarettes to bring them to non-addictive levels. The FDA news is causing a sell-off in shares of tobacco companies, including Altria Group, owner of Philip Morris USA and the leading U.S. cigarette brand — Marlboro.

In California, tobacco also is facing challenges due to April's steep increase in cigarette excise taxes. Several independent retailers interviewed for this story say the decline in sales was steeper than they had expected. However, some report that coupons provided by the tobacco companies are helping to cushion the blow.

"We're down 50 percent," said Sam Mroky, store manager at Cigarette Depot in San Diego. "Before the price went up, a lot of people stocked up on cigarettes. I'm the cheapest one in the town now and … still business is no good."

The falloff in sales is evident in a study released this month by the state Legislative Analyst's Office. It shows revenues from the state's cigarette excise taxes plunged 64 percent in May 2017 compared with the year earlier.

An informal check of more than a dozen independent retailers statewide found more than half of them were experiencing a drop of 10 percent or more in cigarette purchases. Several others, though, indicated they had seen a recovery in June or July and estimated purchases were down in single digits.

California voters passed a measure in November to boost the cigarette tax by $2 a pack, up from the earlier 87-cent tax. Big tobacco companies spent more than $70 million fighting the voter measure, according to MapLight.

The higher taxes are designed to discourage people from smoking by raising the price of cigarettes. California already has one of the nation's lowest adult smoking rates.

"We went down around 12 percent after the tax," said Andy Musayelyan, manager of Hollywood Smokes in Los Angeles.

On Thursday, Altria reported second-quarter adjusted earnings per share that were short of Thomson Reuters consensus. The company said its smokeable segment's results were hurt by the cigarette excise tax increase in California.

According to Altria CEO Martin Barrington, the company's flagship brand, Marlboro, has more than 50 percent share in the California market.

The CEO called California "a high-volume state," noting it previously accounted for about 7 percent of total U.S. cigarette industry volume but since the tax increase its volume contribution fell to 5 percent. As a result, he said total U.S. industry cigarette volumes were down around 4.5 percent in the June quarter.

Altria and other big tobacco companies have been using coupons to make the California tax hike more palatable to consumers.

"The tobacco companies have been sending out a lot of coupons to our customers," said Dave Mesesan, store manager for Rod's Liquor in Orange, California. "They're trying to deal with the tax increase the best they can."

A bill that would have prohibited the redemption of all coupons and promotional discounts for tobacco products failed to pass recently in the state legislature. The bill was proposed by Assemblyman Kevin McCarty (D-Sacramento).

"Tobacco coupons are nothing more than a deadly promotional trick by the tobacco industry to keep Californians smoking, leading to illness and early death for our residents, with taxpayers footing the bill," McCarty said in a statement.

The higher cigarette prices also have attracted theft rings.

Three suspects are being sought for several recent thefts of cigarettes from Walgreens stores in the L.A. area, according to the Burbank Police Department. It said there have been eight reported incidents involving the same suspects, including in Burbank, and estimated losses were running into the thousands of dollars.

Similarly, there have been big thefts of cigarettes reported in recent months in other areas of the state, including Redding, Riverside and Bakersfield.