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'Well-connected' cigar industry spared tax in Pa.

Natasha Lindstrom
| Sunday, Nov. 6, 2016, 5:21 p.m.
Jim Robinson of Brookline — owner of Leaf & Bean, a coffee and cigar shop in the Strip District — listens to live music at his shop Saturday, Nov. 5, 2016.
Andrew Russell | Tribune-Review
Jim Robinson of Brookline — owner of Leaf & Bean, a coffee and cigar shop in the Strip District — listens to live music at his shop Saturday, Nov. 5, 2016.
Rita Formhals of Observatory Hill smokes a cigar at Leaf & Bean, a coffee and cigar shop in the Strip District on Saturday, Nov. 5, 2016.
Andrew Russell | Tribune-Review
Rita Formhals of Observatory Hill smokes a cigar at Leaf & Bean, a coffee and cigar shop in the Strip District on Saturday, Nov. 5, 2016.
Andrew Russell | Tribune-Review
Jay Richards of the Strip District smokes a cigar at Leaf & Bean, a coffee and cigar shop in the Strip District while listening to live music, Saturday, Nov. 5, 2016.
Andrew Russell | Tribune-Review
Jay Richards of the Strip District smokes a cigar at Leaf & Bean, a coffee and cigar shop in the Strip District while listening to live music, Saturday, Nov. 5, 2016.
The humidor at Leaf & Bean in the Strip District and owned by Jim Robinson of Brookline offers a variety of cigars, Saturday, Nov. 5, 2016.
Andrew Russell | Tribune-Review
The humidor at Leaf & Bean in the Strip District and owned by Jim Robinson of Brookline offers a variety of cigars, Saturday, Nov. 5, 2016.
The humidor at Leaf & Bean in the Strip District and owned by Jim Robinson of Brookline offers a variety of cigars, Saturday, Nov. 5, 2016.
Andrew Russell | Tribune-Review
The humidor at Leaf & Bean in the Strip District and owned by Jim Robinson of Brookline offers a variety of cigars, Saturday, Nov. 5, 2016.

Just a few weeks ago, on her second trip ever to the state Capitol, Amy Krivella had high hopes the political tide was turning in favor of Pennsylvania's “vapers.”

The 37-year-old owner of East Coast Vapes in Cranberry had joined about 300 people rallying in support of a last-ditch bill to lessen a new 40 percent tax on e-cigarettes that has spurred the shuttering of at least 37 vape shops statewide. She met with lawmakers and told them her sales would plummet, she couldn't keep the right products on her shelf and — worst of all — she was about to lay off two of her four employees.

She sat in the House galley waiting for the fix-it bill to go up for a vote — but it never happened. Instead, lawmakers spent much of the afternoon session discussing a bill that would ban municipalities from future taxes on plastic bags.

“I just thought the government was for the people,” Krivella said, “and not for their pockets.”

While Pennsylvania's newly opened vape shops sweat their survival, the state's storied cigar industry can breathe easy for at least another year. It's a conundrum that's unsettling to vape shop owners who wonder why their jobs seem to matter less.

The Legislature in July raised the tax on cigarettes by $1 per pack and began taxing smokeless tobacco, pipe tobacco, roll-your-own tobacco and e-cigarette products for the first time last month to help patch a $2 billion budget gap and avoid another lengthy impasse.

“It is almost embarrassing that we tax all other tobacco products and don't tax cigars,” said former Gov. Ed Rendell, who pressed for cigar taxes during his tenure helming the state between 2003 and 2011.

“It is a perfect example of one of those things that is absolutely just and right and necessary getting held up by special-interest lobbying,” Rendell continued. “It's just that the anti-cigar tax people are better organized, and they have better lobbyists.”

In the United States, only Pennsylvania and Florida do not tax premium or convenience-store cigars. For years, opponents to taxing cigars have argued that doing so would upend the state's wholesale cigar industry and prompt major manufacturers concentrated in the Lehigh Valley and Philadelphia suburbs to flock to the Southeast.

“The cigar industry stands out here because it's a fossil,” said Eric Epstein of Rock the Capital, a state government watchdog group in Harrisburg. “They have deep pockets, long-term relationships; they're sophisticated. They can buy politicians and finance lobbyists. These are well-connected, well-placed schmoozers.”

'Politics as usual in Pa.'

One of the larger manufacturers, The Altria Group's John Middleton Co., a parent company of Philip Morris USA, employs more than 400 people in Limerick and King of Prussia. Middleton, co-owner of the Phillies, sold to Altria his cigar company — known for the popular brand Black & Mild — during Rendell's tenure for $2.9 billion, and it now claims 27.7 percent of the total U.S. retail share of machine-made cigars.

Altria Group spent more than $1.8 million in the past three years on firms employing close to three dozen lobbyists and pumped $1 million into political campaigns, state records show. Nationally, Altria spent $9.6 million on lobbying in 2015 and $6.9 million in 2016, plus another $2.3 million in political contributions, OpenSecrets.org reports. Fifty of its 63 lobbyists nationwide are former government workers.

“This is politics as usual in Pennsylvania,” Epstein said. “It's not about the public good; it's about the private bankroll.”

Altria spokesman David Sutton said: “We communicate John Middleton's position with elected officials, the trade, consumers, media and other stakeholders when cigar excise taxes are being considered.”

Sutton noted that despite lacking a specific cigar tax, the state raked in $59 million in sales tax revenue on tobacco products other than cigarettes in 2015. He argued a cigar excise tax would incentivize illegal tobacco product trafficking and “do little to solve systemic state budget problems” while leading to “less stability in a state's finances.”

In contrast, “I'd say the vast majority of vape shop owners don't have college degrees; they don't have business degrees; they're former smokers who decided to help other people quit,” said Bill Godshall, executive director of Smokefree Pennsylvania, a Swissvale-based nonprofit that advocates anti-smoking policies.

“They didn't see it coming,” said state Sen. Wayne Fontana, D-Brookline, who initially supported the vape tax but became open to modifying it after being flooded by emails from vaping advocates “after the fact.”

“I think all of us (lawmakers) were just like, ‘Well, OK, it's another industry that's dealing with some sort of nicotine product so it's probably not good for people in this state,' ” Fontana said. “This was more about indifference, I think, than emotion toward this industry.”

At least 67 of the state's about 350 to 400 vape shops have closed since the summer, and 37 of the former store owners claim to have done so directly because of the new tax, said Dave Norris, president of the Pennsylvania chapter of the Washington-based Smoke Free Alternatives Trade Association and owner of three vape shops near Harrisburg.

“I don't think we know enough to blame it all (vape shops' troubles) on the tax,” said Rep. Mary Jo Daley, D-Narberth, who visited her first vape shop on Monday at the request of constituents. She and others pointed to a slew of other challenges confronting the vaping industry, including Food and Drug Administration regulations unveiled this summer that advocates say threaten to ban most vaping products by 2019.

Many of the first shops to close had determined they had too much inventory to pay the 40 percent “floor tax” on top of the 40 percent tax increase on all vaping-related products — including not only the liquid vaping “juice” but also the devices, related attachments and batteries used to power them.

“If I were to design tax policy that would be bad for everybody in Pennsylvania, it would probably look a lot like this tax,” said Antony Davies, an economics professor at Duquesne University, who slams the vaping tax for coming off like “a handout for big pharma and big tobacco.”

Davies said the vaping tax is short-sighted in that it won't bring in a lot of money while potentially causing a negative economic impact when factoring in jobs and revenue from existing payroll, sales and property taxes.

“Look, it's a concern. In the perfect world, perhaps we could have designed it differently,” said Drew Compton, spokesman for state Sen. Joe Scarnati, a Jefferson County Republican who opposes a cigar tax.

“But (vaping) is a relatively fledgling industry, so the idea that, ‘Well, because they're not entrenched, they didn't get the influence they wanted,' I don't think that's fair,” Compton said. “Taxation is always a discussion of the lesser of evils. People I represent don't sit around and go, ‘Gee, what's the next thing we can tax?' ”

‘Pass what you can'

Behind closed doors in Harrisburg two weeks ago, House GOP leadership declined to take up a bill backed by 57 bipartisan co-sponsors that would have lessened the tax burden on vape shops. Insiders said an amendment Daley proposed to enact a 40 percent tax on cigars and a threatened veto by Gov. Tom Wolf killed the proposal's chances of a vote on the House floor.

“I would be in favor of taxing all of them equally,” said Daley, noting she'd heard from plenty of cigar smokers but didn't hear much from vapers until recently. She has doubts about vaping's safety and use as a smoking cessation method but says she wants to learn more. “It's very hard to pass something that's perfect. You pass what you can that's the best you can do at the time.”

If the state were to tax cigars at 40 percent, “We'd close the doors,” said Marc Adams, owner of Bloom Cigar Company in the South Side.

The state is counting on $13.3 million in revenue from e-cigarette taxation to help balance its 2016-17 budget.

A similar 40 percent cigar tax would generate more than $31 million, according to the office of state Rep. Joe Markosek, Democratic minority chair of the House appropriations committee.

“I find it surprising,” said Davies, “and I can only think of two possible explanations: One is that the Legislature just didn't pay attention at all, spent no time thinking about this; the other that they're doing this to aid certain favorite industries.”

Cigarettes, in comparison, brought in $110 million in September and $135 million in October, state Department of Revenue figures show. Smokeless tobacco products are expected to generate $46.2 million annually, with another $2 million from pipe tobacco and $200,000 from the roll-your-own kind. Wolf and Democrats such as Daley had initially preferred relying more heavily on broad-based personal income tax — a plan that didn't pass muster with the GOP-controlled General Assembly.

“I find it ironic that this is a morally conservative state that depends on vice taxes, whether it's alcohol, gaming or tobacco,” Epstein said. “It's very sad that we actually need people to drink more, gamble more and smoke more to balance the budget. Pennsylvania's budget is a frat party on steroids.”

House GOP spokesman Steve Miskin pointed out that large manufacturers carry heavy weight in policymaking because they generate substantial economic activity, with an estimated 1,000 to 1,500 jobs tied to Pennsylvania's cigar industry.

“If you're worried about jobs, you don't tax an emerging industry into submission,” argued Epstein. “And it's hard to justify (taxing) vaping when a public health hazard remains tax-free. Why are we funding smoking cessation if we are providing tax breaks to cigars? It's asinine.”

Scott Drenkard, director of state projects for the Washington-based Tax Foundation, said that when policymakers “start using tax law to force good behavior, you get all these really perverse outcomes.”

“I understand the impetus to just expand new sin taxes,” Drenkard said, “but this will come at the expense of public-health gains.”

Debate rages in the global public health community over the safety and unregulated nature of e-cigarettes, which have gained popularity in the U.S. since about 2007. This past week, the Allegheny County Board of Health advanced an indoor ban on vaping in all public spaces and workplaces countywide in a move to join some 500 jurisdictions nationwide that have relegated vapers to places traditional cigarette smoking is allowed.

Vaping proponents argue that shrinking their industry will lead to former smokers returning to tar-filled cigarettes, which are proven to cause harmful effects that claim lives while scant research is available about potential dangers of vaping.

“Two industries that are going to benefit from this tax are the pharmaceutical companies that sell the nicotine patches and gum, and the tobacco industry that's going to sell more cigarettes,” said Davies. “Any time the Legislature starts picking and choosing winners and losers in the marketplace, generally, they're going to make bad decisions because it's not their money that's on the line.”

The fix-it vaping bill would have enacted a 5 cents per milliliter tax on the liquid only, modeled after tax laws in North Carolina and Louisiana. But with elections on Tuesday, it's effectively too late to alter the vaping tax before the next legislative session.

“Unfortunately, what we've learned through this process is it's because we're too small,” Norris said. “We don't have the financial resources to influence the political process. And now we're out of time, and that's horrifying.”

Vaping advocates are working to get better organized and raise their own lobbying money; Norris' trade group is spending most all its donations on a dedicated lobbyist at Emerald Strategies in Harrisburg. A group formed in October, AdvocacyBags.com, promotes selling discounted product bags whose proceeds go toward advocacy work in support of vaping.

“Between the 40 percent tax and the FDA, on a daily basis it feels like a battle,” Krivella said. “You know that you don't have the money to keep up, but if you quit, then you're just giving in.”

Natasha Lindstrom is a Tribune-Review staff writer. Reach her at 412-380-8514 or nlindstrom@tribweb.com.

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