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Smokers Turn to Pipe Tobacco to Avoid Higher Taxes

5:02 PM, Jul 12, 2011   |    comments
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By BRIAN TUMULTY, Gannett Washington Bureau

WASHINGTON - Sales of pipe tobacco are skyrocketing, but not because more Americans are smoking pipes.

Loose bags of pipe tobacco are being sold at smoke shops and on the Internet for use in roll-your-own cigarettes. And machines that make the equivalent of a carton of cigarettes in about 10 minutes are being installed in smoke shops in many states.

Anti-smoking advocates trace the trend to April 2009, when the federal excise tax on a pack of cigarettes increased from 39 cents to $1.01. Similar increases took effect for big cigars and the tobacco used in roll-your own cigarettes.

Taxes on pipe tobacco and small cigars didn't increase nearly as much.

As a result, the government may have lost up to $1 billion in potential revenue since 2009 because smokers have shifted their buying habits to favor the lower-taxed tobacco products, advocates say.

One of those smokers is 31-year-old Danielle Davis of Ulster, Pa.
Davis, a Subway sandwich shop worker who smokes one-and-a-half packs a day, used to spend $50 on a carton of Kools. Now she drives to the new Smokers Best Buy in nearby Sayre, where she pays $26.50 to have a machine produce 195-199 cigarettes - just under the 200 in a conventional carton.

Davis said that when a store employee gave her a free cigarette to test the tobacco on her first visit, "It tasted like air.'' But by the third cigarette she had found a blend she liked.

Her truck-driver husband, Scott, usually buys two cartons of roll-your-own cigarettes at a time at the smoke shop, located in a former Jiffy Lube auto service center just inside the Pennsylvania-New York border.

Jennifer Groleau, the smoke shop's business manager, said plans are in the works to open several more smoke shops in northeast Pennsylvania.

The shop draws 40 percent to 45 percent of its customers from New York, which has the highest state cigarette taxes in the nation.

Pennsylvania is the only state that doesn't tax non-cigarette tobacco products such as pipe tobacco.

The current federal tax on roll-your-own tobacco is $24.78 per pound. The rate on pipe tobacco is $2.83 per pound.

Experts say the pipe tobacco used in roll-your-own cigarettes is mislabeled. True pipe tobacco smolders. The pipe tobacco sold for use in roll-your-own cigarettes burns quicker, they say.

But the Treasury Department's Alcohol and Tobacco Tax and Trade Bureau hasn't come up with an enforceable rule that distinguishes between the two type of loose tobacco.

Shipments of pipe tobacco almost doubled between 2009 and last year, from 12.9 million pounds to 25.1 million pounds, according to the bureau.

At the same time, shipments of non-pipe tobacco used in roll-your-own cigarettes dropped from 12.2 million pounds to 6.4 million pounds.

And shipments of individual cigarettes dropped from 318 billion to 300.5 billion.

The lower tax rate on small cigars has brought changes as well.
Some manufacturers have begun modifying cigarettes - adding to their weight and including tobacco in the paper tubing - so they'll qualify as small cigars.

The tax loopholes have produced an unusual alliance that includes the Campaign for Tobacco-Free Kids, the American Cancer Society and discount cigarette maker Liggett Vector Brands.

"This is just one example of how the tobacco industry has, shall we say, maneuvered products to escape taxation at the rate they should generally be taxed,'' said Gregg Haifley, federal lobbyist for the American Cancer Society.

Liggett CEO Ron Bernstein sees it as a fairness issue because his company's discount cigarettes are taxed at the higher rate.
"What we are looking for is a level playing field,'' he said. "We believe in playing by the rules.''

The loopholes also present an important public health issue because young people are two to three times more price sensitive than adults, said Danny McGoldrick, vice president of research at the campaign for Tobacco-Free Kids.

"The simplest way to fix this is to equalize the tax,'' he said.
He and other advocates say key members of Congress want to do that.

One of those lawmakers is Rep. Henry Waxman of California, the ranking Democrat on the House Energy and Commerce Committee who led the successful effort to give the Food and Drug Administration power to regulate tobacco.

"Some tobacco companies are employing public deception and legal trickery to endanger the public health, evading tax laws that protect our children," Waxman said. "So we have got to close the loophole in the tax code."

Anti-tax sentiment in the Republican-controlled House could be an obstacle. GOP purists view legislation to close tax loopholes as de-facto tax increases.

In Pennsylvania, Danielle Davis said she isn't surprised some members of Congress want to close what they see as a tax loophole.

"Nothing ever lasts for too long,'' she said. "But at least you can go for a while.''

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