Study: Moist tobacco does better where tax is weight-basedcopenhagen

Moist smokeless tobacco volume is increasing faster in states employing a weight-based excise tax versus states that use an Ad Valorem tax, according to an analysis by Willard Bishop, a consulting firm in Barrington, Ill.

Only nine states use a weight-based tax, Willard Bishop said Jan. 16 in releasing results of its analysis. Those nine reported volume can growth of 10.7 percent for a 13-week period in 2006 compared to the same period in 2005 (see table).

In the states with Ad Valorem tax, volume can growth was 7.5 percent, according to the firm’s analysis. Ad Valorem tax is typically expressed as a percentage of the wholesale price.

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David Bishop, vice president of convenience and small store formats practices at Willard Bishop, said of the findings:

  • “First, this analysis illustrates that there’s latent growth in the category that may be realized if states convert to a weight-based tax.” And, at the close of 2006 there were still 40 states using an Ad Valorem type of tax, which implies that continued changes to the current taxing structure could drive incremental category growth.
  • “Secondly, the faster volume growth in Tier 1 helps to accelerate gross profit dollar growth due to its higher penny-profit potential versus the other price tiers.” In fact, previous studies conducted by Willard Bishop document that in some cases, the gross profit per unit sold for Tier 1 products is more than twice that of Tier 3 products.
  • “Finally, all the price tiers experienced stronger growth rates in the weight-based states, underscoring that the change is probably good for all MST products.” This should allay concerns that a conversion creates competitive advantage for any one product manufacturer.

    Furthermore, the analysis demonstrates that the benefit of a weight-based tax also extends to state governments, according to Bishop.

    “After studying the impact of recent conversions in New Jersey, Rhode Island and Vermont relative to can volume and tax rates, we found that, combined, the tax revenue for these three states increased 33 percent over [the previous year’s] August through October time period,” Bishop said.

    • The analysis provides evidence that a weight-based type of tax in MST benefits both the industry and the state government, Bishop said.

    Bishop said he became more interested in the tax issue after completing a retailer survey in August 2006 when he discovered a broad retail belief that state excise taxes negatively impact the potential for stronger profitability in MST. “We learned that 73 percent of the retailers surveyed either agreed or strongly agreed that state excise taxes are negatively impacting their ability to grow MST profits year-over-year,” Bishop said. The importance of understanding the taxation issue was driven by the fact that 69 percent of the retailers surveyed agreed or strongly agreed that most state excise taxes place an unfair burden on the premium products.

    “When you get these types of results and then look at the taxing environment across the United States, you begin to wonder if there’s a more effective type of tax,” Bishop said.

    The Willard Bishop consulting firm works with retail and foodservice companies.