It's not a great time for tobacco retailers. A five-year-old federal tax increase has had a significant impact on national tobacco use, as found in a report by the Government Accountability Office. And some Madison-area businesses are feeling the pinch.
"We lost customers," says Stephen Mahley, a bartender at Drackenberg's Cigar Bar on North Sherman Avenue. Mahley tracks tobacco tax and policy changes for proprietor Jackson Halink.
Mahley says the Child Health Insurance Program Reauthorization Act of 2009 included a dramatic tax increase for some tobacco products and forced some retailers out of business. The tax rate on small cigars increased more than 26-fold, from $1.83 to $50.33 per thousand cigars. Taxes on large cigars increased 155%. Some of Drackenberg's customers who used to smoke a cigar a week, now only do so once a month.
These tax disparities also led to a shift in sales from small cigars to large ones and from loose cigarette rolling tobacco to pipe tobacco. Taxes on cigarettes and roll-your-own cigarettes were also increased.
The 2009 tax hike is only one of the many imposed in recent years to discourage smoking, according to the July 29 report from the federal Government Accountability Office. The office cites tobacco use as the leading cause of preventable death and a top contributor to health care costs in the United States.
The report compares tobacco sales from 2008 through 2013 and identifies a distinct trend: "Annual sales of domestic and imported pipe tobacco increased from about 5.2 million pounds to 43.7 million pounds, while sales of domestic and imported roll-your-own tobacco declined from about 21.3 million pounds to 3.8 million pounds."
Steve Agee, the manager at Knuckleheads Tobacco & Vapes smoke shop on State Street, says the store has been selling a lot of its dry, fast-burning pipe tobacco which sits on the shelf above the loose cigarette tobacco.
"This is what people have gone to, because they can't afford regular rolling tobacco," Agee says, holding a pound bag of pipe tobacco. He says the store no longer carries cigarette tobacco in tins larger than 5.3 ounces, because the price is too high.
Small cigar sales plummet
The GAO report found that nationally sales of smaller cigars plummeted after 2009, from 5.7 billion sticks to 0.7 billion in fiscal year 2013. In the same time frame, large cigar sales more than doubled from 5.8 billion to 12.4 billion sticks.
Smaller cigars, which are currently in vogue, are often milder and last about 20 minutes compared to the hour or more it takes to smoke a larger cigar.
But Bryant Schaefer, the owner of the Tasting Room in Monona, says there's a steady population that enjoys larger, premium cigars. His sale of those, whose taxes didn't change much in 2009, have remained stable. But, he adds, "Definitely, (the sale of) small cigars went down.
Tobacco taxes bottomed out in the 1980s and have been rising steadily for the past 10 to 15 years, says Howard Chernick, professor of economics at Hunter College of the City University of New York.
"Taxation has been the main force for raising the price," Chernick says.
He says smoking rates decrease slightly as taxes go up, but some users will switch products or find bootlegged ones. "There's always another form of tobacco," he says.
Maduro Cigar Bar in downtown Madison has not seen sales shift much from the tax hike, says Vanessa Shipley, manager for about 14 years. She says the sales of small cigars have remained steady, because many of the bar's clients are irregular smokers and will try the smaller item regardless of price.
Maduro, the Tasting Room and Drackenberg's are all affiliated with various industry groups to lobby their interests with lawmakers. But Tasting Room's Schaefer says tobacco retailers lack the clout of the alcohol and tavern lobbies. He notes that while cigars, like wine, are luxury products that people enjoy in their leisure time, taxes for tobacco have risen dramatically while fees on alcohol have remained static.
And even with some representation in the state and national capitols, no one expects taxes on tobacco will ever be reduced.
"The screw only turns one direction," Mahley at Drackenberg's says. "And it's tighter."