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Largest Ever Federal Tobacco Tax Increase Set For April 1
By David Najor :: Monday, March 23, 2009 :: 24881 Views :: Business & Finance

Michigan, USA - Federal tobacco taxes are set to go into effect April 1.   The biggest federal tax increase will hit roll-your-own tobacco, rising from $1.10 per pound to $24.78 per pound. Store-bought cigarette taxes will head from 39 cents per pack to $1.01 per pack. The state tax for store-bought cigarettes stands at $2 a pack.

Chaldean retailers that sell tobacco say customers are stocking up and driving demand.  Stores that sell loose tobacco and cigarettes are clamoring to keep their inventory stocked.  Unhappy store owner John Kallabat of Canopy Bottle & Gourmet Shoppe in Brighton wonders how sales will fare starting next month. His store sells cigars and cigarettes, but no roll-your-own tobacco.

"It seems like every time they decide to put a tax increase on something it's always beer, wine or liquor or tobacco, and that's our livelihood," Kallabat said.

Gov. Jennifer Granholm's budget wouldn't touch Michigan's $2-per-pack cigarette tax, it would slam other tobacco smokers, chewers and puffers who've been a favorite tax target for states to balance budgets and, in the name of good health, discourage tobacco use.

If approved by the Legislature, state taxes on noncigarette tobacco items would jump from 32 percent of wholesale price to 64 percent next year. Combined with the new federal tax, the average price of a 1-pound bag of popular Gambler tobacco would skyrocket from $19 to $70 in Michigan.

A pound of tobacco can yield 21/2 cartons of homemade cigarettes, using inexpensive machines that stuff tobacco into prefabricated paper tubes with filters. At $70, plus the cost of tubes, homemade would still be cheaper than $50-per-carton prerolled cigarettes, but would not be the bargain it is now.

According to Michael LaFaive, director of the Money Fiscal Policy Initiative at the Midland-based think tank Mackinac Center for Public Policy, once the federal tax hikes go into effect, people should expect to see an increase in smuggling.

LaFaive said it "is not only unnecessary, it is harmful to job providers and will more than likely increase the amount of internationally smuggled cigarettes, including counterfeits from China that are often adulterated."

He pointed to Jin Ling, a popular cigarette whose popularity overseas has rivaled Marlboro due to growing taxes in European nations. He added growth in state taxes will only lead to smuggling from nearby states that have lower taxes.

"You can't make these products as profitable as illegal narcotics and not expect the same kind of unexpected consequences to occur," he said.

The tax increases have some nonstate supporters. Judy Stewart, lobbyist for the American Cancer Society, said raising taxes on cigarettes has proved to cut smoking, and that the tax on noncigarette items should be raised equally to discourage their use.

"We're 100 percent behind that," Stewart said.

Tobacco taxes are expected to generate about $1 billion for the state this fiscal year. Taxes on other tobacco products (OTP) — other than cigarettes — account for 4 percent of the total.

The Michigan OTP tax is applied to the wholesale price plus the federal tax, which will climb to $24.78 per pound April 1. Michigan's 6 percent sales tax then includes state and federal tobacco taxes.

If Michigan doubles its OTP tax, combined with the higher federal tax, a 1-pound package of tobacco would be about $17 cheaper in Ohio than in Michigan, not including sales tax. In Pennsylvania, that bag would cost $23 less than in Michigan.

State officials predict that doubling the OTP tax will double revenues to $90 million. However, they admit they did not account for the higher federal tax, which could spur more smokers to quit.

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