Cigarette Price Hikes Loom Around the Corner

NEW YORK -- Some adult smokers could soon be spending more for a pack of cigarettes thanks to a combination of tax increases and price hikes.

Philip Morris USA is expected to lead the way with a cigarette list price increase of between 5 and 7 cents per pack, according to Bonnie Herzog, managing director, beverage, tobacco and consumer research at Wells Fargo Securities. She pointed out that in the firm's recent Tobacco Talk industry survey, more than 70 percent of the respondents indicated they expected an increase in the May/June timeframe.

However, the price of a pack of cigarettes could rise by even more in California and Illinois. California residents head to the polls Tuesday, June 5 to cast their vote on Proposition 29 -- a ballot initiative that would increase the state's cigarette excise tax by $1 to bring it to $1.87. Other tobacco products would see an equivalent increase, as CSNews Online previously reported. The additional revenue (expected to be between $700 and $800 million annually) is earmarked to fund cancer research -- and not necessarily stay in state.

At the same time that the $1-levy uptick included in Proposition 29 has been getting national attention, this week legislators in Illinois approved a proposal to raise that state's excise tax also by $1 per pack. The bill is now on Gov. Pat Quinn's desk; he is expected to sign the measure.

"The [California] proposed tax increase has had a higher profile as [California) has approximately 7 percent of the U.S.'s smoking population, nearly double [Illinois'] approximately 4 percent," Herzog said. "Regardless, while tax increases may cause a temporary volume disruption, we feel that, after an initial shock, these increases would be absorbed as consumers become conditioned to accept higher price points. In other words, we don't see an incremental negative volume impact that would alter the long-term industry decline rate of approximately 3.5 percent.

"Further, all else equal, a tax increase would narrow the relative price gap between premium and discount brands which could actually soften potential downtrading pressure," she added.