Taxation and New Taxation and New ProductsProducts

Gregory N Connolly DMD, Gregory N Connolly DMD, MPHMPH

National Smokeless and National Smokeless and Spit Tobacco SummitSpit Tobacco Summit

September 22,2009September 22,2009

New Smokeless Products and Acquisitions by the Cigarette Industry

Swisher $4.5 Billion RRJ – 2005 PM Acquired USSTC $16 Billion 2008 PM – Swedish Match International Joint

Venture Introduction of New Forms: Snus,

Dissolvables ?

Today 88% of the Smokeless Market Owned by the Cigarette Industry

Moist Snuff (P)$ % $ %

Retail Price $5.39 100% $7.17 100%State Tax $0.79 14.6% $1.00 13.9%Manufacturers Price $2.62 48.6% $4.20 58.6%Fed Tax $0.04 0.7% $0.39 5.4%MSA Payments $0.01 0.2% $0.38 5.3%Adv $0.30 5.6% $0.70 9.8%Profits $1.63 30.2% $0.50 7.0%

Cigarettes

P=Premium brands Sources: FTC Reports, Annual Report of Altria and USSTC, Tax Burden on Tobacco, NAAG, USB.

Components of a Tin of Moist Snuff and a Pack of Cigarettes (2008)

Tobacco Products Sales

Source data: 1 Statistical report–tobacco. United States Department of Treasury, Alcohol and Tobacco Tax and Trade Bureau. http://www.ttb.gov/tobacco. Accessed July 8, 2009. 2 Tobacco stocks. United States Department of Agriculture, Agricultural Marketing Service. http://www.ams.usda.gov/AMSv1.0. Accessed July 8. 2009.

Small Cigars

Roll Your Own

Moist Snuff (Tins)

Cigarettes

0

400

800

1200

1600

2000 2001 2002 2003 2004 2005 2006 2007 2008

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5,000

10,000

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20,000

25,000

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““This flurry of smokeless This flurry of smokeless category activity reflects the category activity reflects the overall strength and growth of overall strength and growth of the OTP market. In addition to the OTP market. In addition to smokers’ desire for new smokers’ desire for new smokeless alternatives, that smokeless alternatives, that growth is driven by new product growth is driven by new product introductions and flavor introductions and flavor innovations.”innovations.”

www.awmanet.org/dc/dc_cover0706.html

Dual Users are a Big Driver of Dual Users are a Big Driver of Current MST GrowthCurrent MST Growth

““Based on our research, we Based on our research, we believe the bulk of smoker believe the bulk of smoker migration into MST is coming migration into MST is coming from dual users (consumers that from dual users (consumers that dip and smoke). We estimate that dip and smoke). We estimate that about 30% of dippers also smoke. about 30% of dippers also smoke. The proliferation of smoking The proliferation of smoking bans has effectively increased bans has effectively increased the number of dipping occasions.the number of dipping occasions.Source: UBS Research, 2007, Nat’l Tobacco Incidence Study [UST]

Effective Prices of Other Tobacco Products and Cigarettes per Alternative Tax Rates

Data sources: Average price (except for cigarettes) from AC Nielsen ScanTrak; Average cigarette price from Tax Burden on Tobacco (2008). State tax rates from Tobacco Free kids. Federal Tax Rates from U.S Department of Treasury

Price /Tax Cigarettes (20)

Moist Snuff

(1.2 oz)

Dry Snuff

(1.0 oz)

RYO (20)

Small Cigars (20)

Camel Snus (20)

Orbs (15)

Average Retail Price $4.69 $2.62 $2.31 $1.04 $2.02 $3.94 $4.87 2009 Federal Tax Rate $1.01 $0.11 $0.09 $0.80 $1.01 $0.04 $0.01 30% Ad Valorem State Tax Rate $1.41 $0.79 $0.69 $0.31 $0.61 $1.18 $1.46

Total with 30% Ad valorem $7.11 $3.52 $3.10 $2.15 $3.64 $5.16 $6.34 90% Ad Valorem State Tax Rate $4.22 $2.36 $2.08 $0.94 $1.82 $3.55 $4.38

Total with 90% Ad valorem $9.92 $5.09 $4.48 $2.77 $4.85 $7.53 $9.26 50¢ per ounce State Tax Rate $0.60 $0.50 $0.26 $0.21 $0.06

Total with 50¢ weight-based $3.33 $2.90 $2.09 $4.19 $4.94 $1.00 per ounce State Tax Rate $1.20 $1.00 $0.52 $0.43 $0.12

Total with $1 weight-based $3.93 $3.40 $2.35 $4.41 $5.00

Recent Changes in Federal Excise Taxes for Smokeless Other Tobacco Products

Moist Snuff Camel Snus Small Cigars Roll-Your-Own

2008 Federal Tax Basis $0.585 per pound $0.585 per pound $1.828 per 1,000 $1.0969 per pound 2008 Federal Tax Rate $0.04 per tin $0.02 per pack (20) $0.04 per pack (20) $0.04 2009 Federal Tax Basis $1.51 per pound $1.51 / pound $50.33 per 1,000 $24.78 per pound 2009 Federal Tax Rate $0.11 per tin $0.04 per pack (20) $1.01 per pack (20) $0.79 per 20 Δ Federal Tax per Package $0.07 per tin $0.02 per pack (20) $0.97 per pack (20) $0.75 per 20

Smokeless Tobacco – PricesData Sources: ACNielsen Scan Track; Orzechowski, Walker (2008)

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

Moist Snuff Dry Snuff RYO SmallCigars

Camel Snus Camel Orbs SkoalBandits

Cigarettes

Average Retail Price (2007) Federal Tax Rate

Prices and taxes are based on the following units:Moist snuff (1.2 oz); Dry Snuff (1.0 oz); Skoal Bandits (1.2 oz); Camel Snus (20 pouches); Camel Orbs (15 tablets); RYO (20 pieces); Small Cigars (20 pieces); Cigarettes (20 pieces)

Weight-based Taxation of New versus Traditional Smokeless Products

TFK

Quotes:

Moist smokeless tobacco volume is increasing faster in the nine US states that have a weight-based tax than in those with a percentage tax based on the wholesale price, indicating “there’s a latent growth in the category that may be realized if states convert to a weight-based tax.” – Retail and foodservice consulting firm, Willard Bishop.

State Weight-based and Ad Valorem Smokeless Tobacco Taxes(Number of States)

Moist Snuff Chewing and Smoking Tobacco

Weight-Based 18 9

Ad Valorem 31 41

Pennsylvania currently has no tax on non-cigarette tobacco products. Kentucky taxes snuff 19 cents per unit.

Current Moist Snuff Among Current Moist Snuff Among Youth Ages 12-17 YearsYouth Ages 12-17 Years

R2 = 0.8377

0.000

0.005

0.010

0.015

0.020

0.025

0.030

2001 2002 2003 2004 2005 2006 2007 2008

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rs

Data source: U.S. Substance Abuse and Mental Health Services Agency, National Survey on Drug Use and Health, 2002 - 2007

*Note –Sales and price data were derived from ScanTrak scanner data licensed from ACNielsen, a global provider of marketing research information services, in US food stores with at least $2 million in annual sales, US drug stores with at least $1 million in annual sales and all US mass merchandisers, with the exception of WalMart.

““New Snus Products not Expected to Hurt Cigarette New Snus Products not Expected to Hurt Cigarette VolumesVolumes

The majority of our survey respondents (64%) do not The majority of our survey respondents (64%) do not believe either of the new snus products will affect believe either of the new snus products will affect cigarette volumes by promoting current smokers to quit cigarette volumes by promoting current smokers to quit at a faster rate. Rather, the new snus product will at a faster rate. Rather, the new snus product will most likely (1) attract smokers that have previously most likely (1) attract smokers that have previously quit, (2) that are currently using moist snuff, (3) quit, (2) that are currently using moist snuff, (3) smokers that are looking for a temporary nicotine “kick” smokers that are looking for a temporary nicotine “kick” when they cannot smoke, or (4) smokers that would have when they cannot smoke, or (4) smokers that would have quit anyway. This bodes well for RAI and MO share quit anyway. This bodes well for RAI and MO share holders as these new snus products don’t appear to be holders as these new snus products don’t appear to be cannibalizing either Marlboro or Camel brands.”cannibalizing either Marlboro or Camel brands.”Citigroup Investment Research, 2007

““New Snus Products not Expected to Hurt Cigarette New Snus Products not Expected to Hurt Cigarette VolumesVolumes

The majority of our survey respondents (64%) do not The majority of our survey respondents (64%) do not believe either of the new snus products will affect believe either of the new snus products will affect cigarette volumes by promoting current smokers to quit cigarette volumes by promoting current smokers to quit at a faster rate. Rather, the new snus product will at a faster rate. Rather, the new snus product will most likely (1) attract smokers that have previously most likely (1) attract smokers that have previously quit, (2) that are currently using moist snuff, (3) quit, (2) that are currently using moist snuff, (3) smokers that are looking for a temporary nicotine “kick” smokers that are looking for a temporary nicotine “kick” when they cannot smoke, or (4) smokers that would have when they cannot smoke, or (4) smokers that would have quit anyway. This bodes well for RAI and MO share quit anyway. This bodes well for RAI and MO share holders as these new snus products don’t appear to be holders as these new snus products don’t appear to be cannibalizing either Marlboro or Camel brands.”cannibalizing either Marlboro or Camel brands.”Citigroup Investment Research, 2007

““When scientists have identified undesired When scientists have identified undesired compounds in a product, we have seen it compounds in a product, we have seen it as our responsibility to reduce or eliminate as our responsibility to reduce or eliminate these compounds, if feasible.” these compounds, if feasible.”

www.myeval.net (Swedish match No America) (Swedish match No America)

We focused on innovation, We focused on innovation, introducing a variety of more introducing a variety of more approachable new products that approachable new products that would appeal to smokers. We would appeal to smokers. We also ramped up our also ramped up our communication with smokers, communication with smokers, acquainting them with smokeless acquainting them with smokeless tobacco products.”tobacco products.”

Butler, President USSTC (USSTC, May, 2008)Butler, President USSTC (USSTC, May, 2008)

Revenue Losses From Standard Weight-Based Tax on Moist Snuff (in constant dollars)

$50

$60

$70

$80

$90

$100

Base Year Year 1 Year 2 Year 3 Year 4 Year 5

Projections assume stable consumptionand sales over time, with inflation at 2% per year.

TFK

Differences in State Revenues From Different Ways of Taxing Moist Snuff -- An Historical Perspective --

$100.0

$110.0

$120.0

$130.0

$140.0

Base Year Year 1 Year 2 Year 3 Year 4 Year 5

Weight-Based Tax Percentage-of-Price Tax Percentage-of-Price w/ Minimum

[Based on actual 2000 to 2005 moist snuff sales price and volume data for from the U.S. Federal Trade Commission, and on recent industry data on the moist snuff market share and average prices of premium, value and discount brands.]

TFK

Domestic Smokeless Advertising and Promotional Expenditures 1998 – 2006 (Millions of dollars)

Source: Federal Trade Commission Smokeless Tobacco Report for 2006

145.5170.2

224.6236.7 234.6 242.5

231.1250.8

354.1

0

50

100

150

200

250

300

350

400

1998 1999 2000 2001 2002 2003 2004 2005 2006

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