Smokescreen Shrouds Smokeless Tobacco Tax

Last week, the Texas House passed a smokeless tobacco tax hailed by Republicans and groups like the Texas Association of Business as a giant step forward in closing a “tax loophole.” TAB has even taken out radio advertisements touting this, and the benefits that the tax will have on the quality of rural health care.

The reality, however, is far from the truth, and seems to have escaped all but a passing notice from the mainstream media.

Here is what what Texas Association of Business President Bill Hammond has to say about the tax:

True conservatives, and the voters who elect them to office, know the only good tax loophole is a dead tax loophole.

And 25 House Republicans helped kill a tax loophole on Wednesday, May 13, when they voted for House Bill 2154 by state Rep. Al Edwards, D-Houston. The legislation, which goes now to the Senate, will repay the student loans of doctors who agree to practice in medically underserved areas of the state.

To fund the loan repayments, HB 2154 closes an excise tax loophole on smokeless tobacco that has inexplicably persisted for years. The measure taxes smokeless tobacco on a per unit basis – just as the state does cigarettes and alcohol – instead of on its sales price.

It makes perfect sense, and it’s fair. That’s why Americans for Tax Reform (ATR) and the American Legislative Exchange Council (ALEC) have endorsed this approach. If the state is applying a tax – and, for the record, the Texas Association of Business, has an unmatched history of opposing tax increases in this state – common sense says the tax must be applied evenly. Government cannot be picking winners and losers.

In reality, the Legislature–and TAB–have stepped into the middle of a huge marketing fight between tobacco companies, and have used this ti equalize and cap the tax paid so that the producers of expensive snuff brands like Skoal and Copenhagen get to keep 100 percent of their price increase

While not acknowledging the fact that the Texas Legislature has stepped into a 50-state marketing war between tobacco companies, even the conservative American Legislative Exchange Council (ALEC) has been forced to correct Hammond through a statement issued this week. In the statement, ALEC also points out that the tobacco tax is not revenue neutral, but in fact, a massive tax hike:

However, ALEC believes this bill should be revenue neutral. In fact, if HB 2154 is enacted, it would raise taxes by $90 million. We do not believe this legislation should be used for a revenue enhancer and we do not support the idea of raising taxes during these tough economic times.

Finally, Mr. Hammond is incorrect when he states the Texas legislature is merely closing a “tax loophole.” In fact, tobacco companies already pay taxes on their products and this only changes the manner in which these taxes are paid. Readers of your publication should not be led to believe that tobacco companies are currently using some sort of loophole to avoid paying taxes and that HB 2154 remedies this—because that would be wrong.

Hammond and his allies are also selling the tax as the right thing to do because it benefits rural healthcare:

Finally, the claim that voters are going to punish lawmakers for treating all smokeless tobacco products the same, is patently absurd. I find it hard to imagine that Republican voters want to punish lawmakers for closing a tax loophole to fund a program designed to help attract doctors to medically underserved areas.

Rep. Warren Chisum, and others, identified a great way to help attract physicians to rual Texas, and the 114 Texas counties that are currently underserved. That’s why TAB was proud to get behind this legislation early on. We salute all the members who rose above misleading claims to support this measure, now contained in HB 2154.

This is a bit of a smoke screen, though. Consider the Sporting Goods Tax. There was a battle over it in the 80th Session because it was at one time partially redirected from state parks to boost general revenue dollars. There is nothing whatsoever that would ultimately prevent budget writers or the LBB from simply taking this $90 million in new revenue and reallocate it in the future. Just because the tax is designated for that purpose now doesn’t mean it will always be used for that. Too, it is particularly doubtful that the loan repayment program will actually keep physicians in rural areas for longer than a couple years. It could, in fact, make rural areas a revolving door where physicians can come to get loan repayment assistance and then move on to bigger and better things, leaving hospitals and family clinics–and ultimately patients looking for a general practitioner–with no consistent level of care. Plus, what happens when the Legislature–as they are likely to do–simply reappropriates this money for something else in lean times or in another session? Would communities that have grown used to a certain level of service then be deprived of that level of service?

Finally, the whole tax increase is simply another salvo in a war between tobacco companies.

Consider how the designer brands of snuff are impacted versus the value brands. Under the new weight-based tax, the price on some cheaper brands of snuff increases by 144 percent.

More expensive brands like Skoal and Copenhagen are sold at a manufacturer’s price of $2.39.Under the old 40 percent ad valorem tax method, the tax on a can was $.96. Under the new weight-based method, the tax would be $1.32, or a tax increase of 38 percent.

On the value brands like Grizzly, Timberwolf, and Redwood, the manufacturer’s price is $1.35. The ad valorem tax of 40 percent created a tax of $.54. With the new weight-based tax, the tax would be $1.32. That’s a tax increase on the less expensive brands of 144 percent.

For Phillip Morris, the manufacturer of the designer snuff brands, this amounts to a bailout. Skoal and Copenhagen have been losing marketshare to the value brands across the country and in Texas for decades. Right now, Skoal and Copenhagen have only about 50 percent of the marketshare compared to the value brands. The new tax actually allows more expensive brands to be taxed less. That’s why US Tobacco and Phillip Morris have been hawking the plan since 2001. They were unsuccessful, however, because it wasn’t cloaked in any warm fuzzies or anti-tax rhetoric. This session, they’ve got Bill Hammond talking about a “tax loophole” and Legislators feeling good about generating tax revenue for a rural healthcare provider loan repayment program even though most of the revenue from the tax will go to the general fund or to property tax relief. Only a fraction of the tax revenue will go to the loan repayment program.

Tweet This Post   Ping This Post

Bookmark It