Proposed Cigar-Tax Hike Has Aficionados Fuming

WASHINGTON – Dennis Hawk is going to keep smoking cigars...for now. The 41-year-old isn't ready just yet to give up his hour-long smoking sessions, even in the face of a proposed federal tax hike.

Rather, Hawk's game plan is to "buy as much as I could" before a hefty bump up in taxes, he said. The operational aide at the White House already has a reserve of about 500 cigars in a coolidor at home. So he's prepared to deal with a tax hike, at least for awhile.

But Hawk will stop purchasing the $12 premium cigars that he favors if the price increases a few dollars, he said. And he's not alone. Other cigar smokers say new taxes could lead them to curb their habits, or switch to less expensive brands.

"If the prices go up a lot, a lot of people will stop smoking. I probably would smoke considerably fewer. I don't think I'd quit, I just wouldn't smoke as many. I wouldn't be able to afford to," said George Edmonson, 57, a retired journalist living in Florida.

And that's too bad, Edmonson said. Premium cigars give smokers — mostly well-heeled and well-educated men — a chance to commune, enthusiasts say. "It is probably the single most bipartisan activity that I know of. I don't know that you can find any other agreement between Che Guevara and Rush Limbaugh," Edmonson said.

Last year, smokers in the United States consumed 5.3 billion large cigars, up 3% from the prior year, according to the U.S. Department of Agriculture. Most cigars are machine made and mass-market priced: White Owls would be a good example. About 6% of cigars are hand-rolled premium, brands such as Arturo Fuente.

A Senate committee has proposed raising the tax on large cigars to 53.13% of the manufacturer or importer's sale price from the current rate of 20.72%. The cap on the tax per cigar would rise to $10 from 4.9 cents. The proposal is part of a tobacco tax package that would fund health insurance for children.

"I view the cigarette tax increase as a health measure in and of itself," Senate Finance Committee Chairman Max Baucus, D-Mont., said in a July 17 letter to Health and Human Services Secretary Michael Leavitt.

"I understand that this cigarette tax increase would keep nearly 2 million children from smoking and encourage another nearly 11/2 million adults to kick the habit. I understand that this cigarette tax increase would prevent nearly a million premature deaths caused by smoking. When given the choice between standing with big tobacco companies and standing with kids, I stand with America's children," he wrote.

The average tax on a premium cigar would be about a dollar, while the average tax on mass-market cigars would be about 16 cents, according to committee figures. To reach the $10 tax cap, a single cigar would have to have a manufacturer's sale price of $19.

There are indications that any eventual increase in tobacco tax rates would be smaller than the Senate's proposal, according to Edwin Park, a senior fellow with the Center on Budget and Policy Priorities. A proposal being considered in the House would increase the tax rate on large cigars to almost 45% of the manufacturer's price, and cap the tax at $1 per stick.

Those who favor taxing tobacco to pay for children's health point out that there's a cost to society and smokers from cigars. Cigar smokers have higher rates of lung cancer and coronary heart disease than nonsmokers, according to the National Cancer Institute.

Retailers up in arms

In the meantime, cigar enthusiasts and industry participants are concerned.

"Just the mere indication of this tax increase will have repercussions," said Norm Sharp, president of the Cigar Association of America Inc. Cigar retailers may be unwilling to stock up to their usual levels, he said.

Cigars make up about 90% of sales at W. Curtis Draper, a Washington tobacconist and cigar lounge, according to co-owner Matt Krimm. The store, located a few blocks from the White House, probably sells 350 to 400 cigars per day, with an average price of $8 a cigar. He expects higher taxes could tamp sales volume by about 15%.

"We have higher-end clientele. We have people that are not necessarily as price conscious as some other shops. That being said I can sell $8 to $10 cigars all day long. [Customers] are going be irate at paying $13 or $14 to pay more taxes," Krimm said.

Draper's clientele is about 95% male, with the average age in the 35-to-50 range, Krimm estimated. Hawk, the White House aide, is one customer.

"Consumers have a breaking point where they just won't spend money on something," he said. "Everybody's got a budget, whether they knowingly or subconsciously subscribe to it. Somebody who spends $20 on a cigar may not spend $28."

Peter, a 37-year-old part-time bartender who enjoys smoking at W. Curtis Draper, usually opts for cigars under $10. He's loathe to start paying another couple of dollars, and said Cuban products, which cannot be legally imported to the U.S., would become more attractive if higher taxes are enacted.

"You just get to the point where you start feeling like you're paying an unfair price," he said. "Cuban cigars don't have any tax...that makes them more attractive. Price matters for me, it matters for most people."

Lew Rothman, president of 800-JR Cigar Inc., a leading cigar retailer, said substantial tax hikes could disrupt sales enough to put a lot of the smaller tobacconists with fewer resources out of business.

"It's sort of a retirement type job," said Rothman, 61, who had his first cigar at 16 from his father's Manhattan cigar store. "These people are not people with tremendous business sense. I think we could survive, a lot of people would not."

There are about 2,500 specialist tobacco shops in the country, according to Rich Perelman, editor-in-chief of the online Cigar Cyclopedia. He added that convenience stores, which enjoy strong sales from tobacco and alcohol, will also feel pain.

"I think clearly people will smoke [fewer] cigars. It's clearly going to have an impact on the mass market," he said. "All you give people by raising this tax by such an enormous amount is a tremendous incentive to break the law" by seeking illegally imported or unregulated cigars.

Importers, regional pain

Within the United States, a downturn in cigar consumption would hurt Florida, observers said. Eric Newman, president of the J.C. Newman Cigar Co. and president of the Cigar Manufacturers Association of Tampa, Fla., estimates that 80% of all cigars sold in United States are produced in Florida or imported there.

"It's really a Florida industry that is being threatened," he said.

Countries such as Dominican Republic, Honduras, Nicaragua, and India would also feel a sting if higher taxes cut cigar consumption. Last year, the United States imported 795 million large cigars, up 18% from the prior year. The Dominican Republic accounted for more than 69% of the imports, with Honduras, Nicaragua, and India also being major suppliers, according to the USDA.

The vast majority of premium, hand-rolled cigars are made outside of the United States.

Danli, Honduras, a city of about 40,000, with only its main roads paved, is dependent on the cigar industry, according to cigar industry participants.

Camacho Cigars has had factories in Danli for decades, and employs about 3,400, according to Christian Eiroa, president of the company. Camacho only produces handmade cigars, making about 15 million a year, with workers such as rollers — the highest-paid position — earning more than $300 per month.

"Cigar stores are most of our business, and they are mom-and-pop operations. They are not big corporations. These are guys that when they lose their customers are out of business," he said. "When there's a slowdown we have to cut production."

Even the smaller tax hike under consideration by House lawmakers could still be painful to absorb, Eiroa said.

"I honestly don't think that these guys knew the impact of the proposal," he said. "I don't think anyone wants to ban our industry."