Cigar
Association of America, Inc.
August 31, 2005
The Honorable Charles Grassley The Honorable Max Baucus
Chairman
Ranking Member
Committee on Finance
Committee on Finance
Dear Chairman Grassley and
Senator Baucus:
In response to your request for comments on S. 1447, the
Cigar Association of America would urge you to make a technical correction to
the American Jobs Creation Act of 2004 (“AJCA”), specifically to the provisions
under Title VI, the Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”),
providing for the buyout of tobacco quota owners and growers. The members of the Cigar Association of
America account for more than 96 percent of cigars manufactured, imported, and
sold in the
Our comments relate to AJCA section 625, which provides for imposition of assessments as a source for the payments to tobacco quota owners and growers. Section 625(b) requires the Secretary of Agriculture to impose quarterly assessments (during the FY 2005-14 period) on tobacco product manufacturers and importers selling products in the United States, including manufacturers and importers of cigarettes, cigars, snuff, roll-your-own tobacco, chewing tobacco, and pipe tobacco. Section 625(c) provides rules for allocating shares of the total assessment to these different classes of tobacco products.
Cigars
erroneously subjected to assessments
From a policy perspective, it was a clear mistake for cigars to be included in the AJCA tobacco buyout assessment regime. The apparent policy justification for the tobacco buyout assessments was that the manufacturing beneficiaries of the Federal tobacco quota/price support program should bear the cost of retiring that program.
That policy does not argue for imposition of the
assessments on cigars. The cigar
industry simply does not make use of quota tobacco. In 2002, the cigar industry’s use of
quota tobacco was just 0.025 percent of the total 905 million pounds of quota
tobacco grown in the
Nor does the cigar industry use any significant amount
of imported quota-type tobacco.
When imported quota-type tobacco is added to domestic quota tobacco, the
cigar industry’s use of such tobacco remains de minimis – just 0.14 percent of the total used by the entire
tobacco industry in 2002. The fact
is, cigars sold in the
The inclusion of cigars in the AJCA buyout program has much to do, we suspect, with the speed in which the AJCA conference negotiations were concluded. Neither the House-passed nor the Senate-passed buy-out provisions included any buyout assessments with respect to cigars. The House-passed bill included no buyout assessment scheme, while the Senate version’s buyout assessment provisions specifically (and correctly) exempted cigars. The assessment regime included in the conference report was wholly new, and developed without the benefit of a full and open airing of views that we believe would have led lawmakers to exempt cigars.
Cigar
industry’s assessment allocation is
miscalculated
A further injustice to the cigar industry is the fact that the industry’s allocated share of the total buyout assessment is overstated.
The AJCA initial allocation percentages were determined
by reference to 2003 excise tax data.
Specifically, the assessment
allocations were calculated by multiplying tobacco products (both domestic and
imported) “removed” (i.e., subject to tax) in 2003 by the maximum excise tax
rate for each class of tobacco. The
AJCA methodology resulted in an estimate that cigars accounted for 2.783 percent
of total tobacco excise taxes in 2003.
This methodology erroneously
assumes that all large cigars were taxed
at the maximum rate of $48.75 per 1,000 cigars. In reality, however, a sizable number of
cigars are sold at a price that yields a tax per 1,000 that is significantly
lower. Furthermore, final
Department of Agriculture regulations implementing the assessment regime
compound this problem by providing that the same flawed
methodology will apply for purposes of determining class allocations for all
subsequent years. Accordingly, absent the appropriate
exercise by the Department of Agriculture of its regulatory authority to base
future assessments on actual tax collections, the allocation percentage for
cigars will continue to be misstated going forward.
Actual
excise tax data for imported and domestic tobacco shows conclusively that the
2.783 percent share for the cigar industry was grossly overstated. Consider the
following:
The
government data therefore indicates that cigars accounted for $161.490 million
($154.361 million domestic plus $7.129 million
imported) of total
FY 2003 tobacco excise tax collections of $7,910.776 million ($7,435.498 million domestic
plus $475.278 million imported), or 2.04
percent.
Thus,
if cigars must be assessed under the buyout program, and the assessment must be
based on excise taxes, the industry’s allocation should be 2.04 percent – not
2.783 percent as enacted under AJCA.
Unfortunately,
the situation only will get worse for the industry over the 2005-14 life of the
assessment program. Because the
large cigar excise tax is the only ad
valorem tobacco excise tax, the cigar
industry’s share of total industry excise taxes will continue to climb as large
cigar prices increase – even if cigar use (relative to other products) remains
constant. As the cigar industry’s
share of taxes rises, its assessment allocation likewise will increase. Based on our projections, the cigar
industry’s share of total assessments will climb from 2.783 percent to more than
5 percent before the assessments terminate. Looked at another way, the
cigar industry’s share of assessments will increase from $282 million over 10
years (if the first-year assessment were held constant) to nearly $400
million.
Recommendation
It remains the strong view of the Cigar Association of America that cigars should be removed from the tobacco-buyout assessment regime, for all of the reasons discussed above. Accordingly, we urge you to consider an AJCA technical correction that would accomplish this result.
If a decision is made not to remove cigars from the buy-out regime, the alternative technical correction would be to set allocations by reference to the actual share of tobacco excise taxes paid (i.e., 2.04 percent in 2003). Further, in light of the unfair application of the assessment regime to the cigar industry, we would urge that the industry’s allocation be frozen at that level for the duration of the assessments.
Sincerely,
President