Nothing To Sneeze At

[May 13th, 2009]

There’s a tobacco war raging in Salem that has less to do with the reasons for past battles—raising taxes or reducing consumption—than it does with control of a rare industry bright spot: smokeless tobacco.

This legislative brawl pits the country’s two largest tobacco companies over a reformulation of the state’s tax on what’s known as “moist snuff tobacco.”

On one side is Philip Morris, which in 2008 acquired U.S. Tobacco—the maker of higher-priced brands such as Copenhagen and Skoal. On the other: lower-priced challenger R.J. Reynolds., maker of Kodiak, Grizzly, Camel Snus and a variety of candy-flavored, teen-friendly packaged products.

Both tobacco giants armed themselves for the Legislature with reams of data, persuasive studies and compelling arguments about tax fairness.

House Speaker Dave Hunt (D-Gladstone) and Rep. Sara Gelser (D-Corvallis) have sided with Philip Morris by sponsoring House Bill 2672. Their bill, which the House has approved 40-18 and now awaits action in the Ways and Means Committee, would change the tax on smokeless tobacco from 65 percent of a product’s wholesale price to a weight-based tax, which would yield $1.78 per ounce regardless of a can’s price.

The bill would dramatically narrow the price gap between Philip Morris’ high-priced products and a competitor such as R.J. Reynolds’ Grizzly brand snuff. Snuff users would pay a uniform $2.14 per 1.2-ounce can; currently the tax on a can of Skoal is $1.55, while the tax on a can of lower-priced Grizzly is only 88 cents.

Over the past decade, according to data produced by both companies, R.J. Reynolds has undercut U.S. Tobacco’s products with aggressive promotions and low prices. In Oregon, R.J. Reynolds has gone from controlling virtually none of the market to grabbing about half of it.

Philip Morris is fighting back in statehouses nationwide.

(Cigarette consumption has long declined in the U.S., so smokeless tobacco, which according to federal statistics is increasing about 7 percent annually, is an unusual growth opportunity.)

Philip Morris argues that a weight-based tax would bring snuff into line with cigarettes, gasoline and booze, all of which Oregon taxes by volume rather than by price.

“The current system, in effect, creates a tax break for lower-priced brands, resulting in an unfair advantage,” says the summary Philip Morris gave lawmakers.

R.J. Reynolds counters that a weight-based tax would disproportionately hurt low-income consumers.

The bill’s fiscal impact is slight. Although Philip Morris claims the change would bring in $18 million in new revenue annually, the Legislative Revenue Office says the change would bring in only $5 million more in the next biennium and that by 2015 the new tax would yield no more than the current tax.

While the bill’s backers say they want to use it to crack down on marketing gimmicks such as freebies, cell phone-shaped containers and other kid-friendly come-ons, it’s hard to escape feeling Oregon is a pawn in a much larger game.

A recent report from the investment bank Morgan Stanley suggests Philip Morris is pursuing an aggressive state-by-state legislative strategy that could earn the company more than $200 million annually—a huge multiple of what Oregon might get from changing the tax.

In addition to helping Philip Morris regain market share, the bill would give Oregon lawmakers a chance to jam R.J. Reynolds and its Salem frontman, Mark Nelson.

Nelson is the wily lobbyist who in 2007 used $10 million in tobacco money to demolish a proposed cigarette-tax ballot measure dear to Gov. Ted Kulongoski and fellow Democrats.

In 1998, when snuff makers agreed to pay $100 million in a master smokeless tobacco settlement, R.J. Reynolds wasn’t in the snuff business and therefore didn’t have to comply with the settlement’s heavy restrictions on promotions and advertising.

Gelser says she simply wants to reduce R.J. Reynolds’ marketing to kids.

No doubt. But HB 2672 requires R.J. Reynolds to either comply with those restrictions or pay 40 cents per can of snuff sold into an escrow account to be held pending future litigation.

Although the tobacco giants are battling in many states, none except Oregon has tried to legislate R.J. Reynolds retroactively into the 1998 settlement.

“We haven’t seen anything like it anywhere else in the country,” Nelson says.