Reynolds American Inc. on Tuesday reported that higher prices and lower expenses offset a decline in cigarette sales during the first quarter.
While earnings exceeded expectations, the nation’s second-biggest cigarette company may soon face the first hike in federal taxes on cigarettes in four years.
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Earlier this month, President Barack Obama proposed almost doubling that tax to pay for pre-school programs for children. Obama’s proposal would increase the tax from $1.01 a pack to $1.95, which the administration said would raise $78 billion over a decade. The last federal tax hike on tobacco products was in April 2009.
The proposed tax increase on cigarettes is popular among health care advocates who believe it provides the additional benefit of encouraging smokers to cut back or quit. In addition to the direct revenue from the tax, the Congressional Budget Office analysis concluded that health improvements related to less smoking would save the government about $1 billion over 10 years and generate additional revenue of $3 billion because of a boost in earnings from healthier workers.
While the tobacco industry criticized the proposal the idea of increasing taxes on low- to middle-income Americans, some analysts have suggested the hike might lead to bigger profits for cigarette makers, as companies like Reynolds American could raise their prices to cover that increase and then some.
Despite saying he didn’t believe the proposal would pass, CEO Daniel Delen discussed the hike in a conference call with analysts on Tuesday regarding Reynolds American’s earnings:
“I think it is not a good development for the category. The category has a price-sensitivity of demand, which has held relatively constant. … So any type of additional taxation that drives consumer prices up is a negative drag on the category.”
