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Could California Tax Increase Smoke Out Volume?

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Could California Tax Increase Smoke Out Volume?

After a 2012 attempt went up in smoke, California finally got around to vote for a measure that could curb smoking and tobacco consumption. Voters in the state supported a $2 tax on each pack of cigarettes, other tobacco products and e-cigarettes. This would bring up the taxes on a pack of cigarette to $2.87 from $0.87 and thus bring the taxation in line with other states.

Siphoned To Useful Ends

The tax proceeds are to be deployed for healthcare, prevention of tobacco use and other products. The California Healthcare, Research and Prevention Tobacco Tax Act of 2016, dubbed Proposition 56 is expected to rake in revenues of $1 billion to $1.4 billion annually by 2017–2018.

Citi Sees Very Limited Impact

Commenting on the development, Citi said in a note that nationwide average retail cigarette prices now increase by 2 percent, hitting volumes by 0.7 percent in a single year. The firm also recalled that a $1 per pack increase in Pennsylvania in 2016 led to a 3 percent increase in the national average.

Citi analyst Adam Spielman is of the view these increases do not herald an acceleration in the state excise tax across many states, given the presidential election results. Noting that tax and legislation are two most important drivers of volume for tobacco, the analyst said both have been very favorable for the industry in the United States.

The analyst does not think there will be an increase in the federal excise tax, which has remained unchanged since 2009, in the next four years, as Donald Trump has been elected president and the Republicans control both Houses of Congress.

Volume May Be A Hit, But Increase May Not Be A Trend

Meanwhile, Jefferies expect the state excise tax hike in California to weigh on the U.S. industry volumes into 2017, as California makes up 7 percent of the national volume, and an average retail price increase of 36 percent is required for pass on. Accordingly, Jefferies analyst Owen Bennett steepened his decline estimate for the U.S. industry volumes to 4 percent from 3.2 percent, with California seeing an estimated 15 percent volume drop.

However, Jefferies does not see the state excise tax hike as a trend, as California has not hiked since 1997 and the state had one of the lowest rate in the country and therefore was due for a catch up.

Jefferies sees opportunity for Reynolds American, Inc. (NYSE: RAI) in moving Newport west of the Mississippi into under-indexed segments. The tax increase in California could support success there. The firm also believes the Newport non-full-flavor menthol offering, which is priced below the Marlboro core franchise, would become an attractive offering for consumers now.

At Last Check ...

  • British American Tobacco PLC (ADR) (NYSE: BTI) was up 2.17 percent at $108.24.
  • Reynolds American was gaining, up 1.56 percent to $53.49.

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