From Rich Perelman at CigarCyclopedia:

A looming time bomb is ticking, which if it explodes in November, may close many of the retail tobacco stores in the state of California.

It goes by the name of “The Tobacco Tax Act of 2006.”

The latest initiative to come from the anti-tobacco lobby, this bill seeks primarily to raise the tax on cigarettes by 13 cents apiece or $2.60 per pack. The state already has an 87 cents per pack tax and the resulting $3.47 per pack rate would be the highest in the nation.

The measure creates a “Tobacco Tax of 2006 Trust Fund” in the state treasury, which in turn will fund a variety of health programs such as research and a variety of anti-tobacco advertising and promotional ventures for state and local government use.

But the insidious nature of this proposition is that California is the only state which links its tax on cigarettes to what are known as “other tobacco products” (“OTP”). These include cigars, pipe tobacco, smokeless, little cigars and roll-your-own cigarettes. It is this aspect of the proposition which will destroy California’s smokeshops. While the tax rate is not specified in the proposition, the state’s Board of Equalization would be required to impose a tax rate “equivalent” to the rate on cigarettes.

California cigar retailers already face a heavy tax burden of 46.76% of the wholesale price of cigars before they ever hit their humidors. So, a box of 25 cigars which has a wholesale price of $100 costs the retailer $146.76 before it goes on the shelves. Instead of selling the box for the normal mark-up, at $200, the box goes on sale for $246.76 or more. Needless to say, such taxes have destroyed most of the “box business” at retailers throughout the state.

But it will get considerably worse if the Tobacco Tax Act of 2006 passes. From 46.76%, the tax will likely rise to 135% according to Charles Janigian, President of the California Association of Retail Tobaconnists (CART). So that box of cigars that cost $100 wholesale will sit on a retailer’s shelf at $235 before a penny is added to pay for rent, staff, insurance, supplies or, dare we even consider, profit. Forgetting the box business completely, a cigar which costs $5 retail today would cost at least $6.70 if the proposition passes.

And that’s not the worst of it.

The measure includes a “back tax” to collect this increased amount on all existing floor stock as of January 1, 2007. Janigian estimates that such a tax would be at an 88% rate, meaning that smokeshops would be required to send the state a check for 88% of the value of their tobacco products in the store as of next January 1, less than two months after the proposition would have passed.

“Most full-service tobacconists carry about $200,000 in [tobacco product] inventory,” noted Janigian in an interview last week. That means that most will face the following choices:

• Pay the state as much as $176,000 for the tax on their existing inventory, a staggering sum for a business which may do $1 million a year in gross revenues, or

• Sell the inventory to the walls, more or less at wholesale prices, by December 31 of this year and lose about $75-100,000 in revenue, or

• Close the store and do something else.

Already, talk is circulating about a nationally-respected California retailer who has given up and is actively working to sell his store. More will certainly follow.

The irony is that while Californians may vote for this draconian tax measure, it will simply collect less and less money over time and lead to (1) an enormous increase in black-market activity in cigarettes and (2) for cigar smokers, more and more purchases in interstate commerce from merchants outside of California.

Janigian also notes that from the cigar point of view, the state is simply forfeiting money. “We have estimated that because of the current [46.76%] tax rate, the state is losing $30 million a year in excise and sales tax revenue,” he said. “Over the seven-year history of the tax since 1998, the state has lost at least $210 million.” And if this new tax measure passes, it will lose more.

Not that the anti-tobacco crowd cares, as the funding from cigarettes will be in the billions.

To get on the November 7 ballot, initiative backers had to gather about 599,000 signatures and Janigian believes they have done so. “I know they have stopped gathering signatures,” he said. Assuming that enough valid signatures have been collected and the measure is on the ballot, the question is whether the state’s voters will once again punish smokers for consuming a perfectly legal product.

The number of smokers in California is one of the lowest in the nation at about 16.6% of the adult population, but even at that figure, is greater than the number of votes it took to elect current Governor Arnold Schwarzenegger. The current tax measure, Proposition 10, passed by an eyelash with just 50.1% of the vote in 1998.

Smokers and those who recognize that – in a state with enormous debt, a well-deserved anti-business reputation and serious problems with an exploding population, middling school achievement and a crumbling infrastructure, there are better ways to spend time and effort than to punish smokers – must band together to defeat this measure.

The cigar store – those few which are left – is worth saving.