Big Tobacco Beats Small Tobacco on Tax Vote

Small cigarette manufacturers would face new state fees on their sales under a measure that passed the Texas House in a preliminary vote on Monday — a big win for Big Tobacco. 

The bill passed 85-53. 

The nation’s four largest tobacco companies currently pay more than half a billion dollars to the state every year as part of a 1998 lawsuit settlement. They have for years lobbied for small cigarette manufacturers, which were not included in the $17 billion settlement, to face a similar financial penalty.

State Rep. John Otto’s House Bill 3536 would charge these small companies 2.75 cents for each cigarette (or .09 ounces of tobacco) sold, used, consumed or distributed in Texas during 2013. The comptroller would compute the rate in subsequent years.

"They all sell the same product," Otto said. "They all are going to cause the state to incur future medical costs.” 

Opponents of the measure — namely the small tobacco companies — say it’s an effort by their massive competitors to put them out of business. They say they weren’t a part of the big tobacco lawsuit because they weren’t engaging in the same misleading practices big manufacturers were accused of.

The measure also drew opposition from anti-tax conservatives. Rep. Van Taylor, R-Plano, reminded fellow Republicans that many of them had signed an anti-tax pledge and would be violating it if they voted in favor of the legislation.

"This is a very simple vote," he said. "It's a vote against higher taxes."

Otto turned the argument around, saying that under current law companies selling identical products are paying different amounts to the state.

"This is about leveling the playing field," Otto said. 

While the bill is tough on small cigarette companies, it eases up on smokeless tobacco, reducing the tax rate on chewing tobacco — established by lawmakers as recently as 2009 — from $1.22 an ounce to 80 cents an ounce.

The bill's fiscal note suggests that the 2009 rate "significantly reduced [the] level of consumption of chewing tobacco" — a stated goal of the tax — but had a disproportionate effect on that industry. The authors of the fiscal note expect an increase in the use of chewing tobacco if the bill passes; the state is unlikely to take a financial hit as a result of the tax decrease.

Otto said the Legislature erred in 2009 when it taxed chewing tobacco at the higher rate because the tax was higher than the wholesale cost of the product.

Rep. Harvey Hilderbran, R-Kerrville, added an amendment to the bill lowering the tax on pipe tobacco by an identical amount.

The bill faces a final House vote before it can move to the Senate.