Sunday, December 28, 2003

DALLAS PIKE, W.Va. -- Just west of the Pennsylvania line the speed limit jumps by five miles per hour, the cigarette tax drops by 59 percent and Scott Orndoff braces for a cross-state nicotine rush.

"This is a destination stop," said Orndoff.

He is an auditor for Gumby's Cigarette World, a chain of stores straddling the West Virginia strip that juts northward between Pennsylvania and Ohio. Two years ago Pennsylvania raised its cigarette tax from 33 cents a pack to one dollar. Trade at Gumby's spiked 30 percent. Now Pennsylvania has added another 35-cent tax on every pack. Staff at Gumby's are laying in an unhealthy supply for the expected invasion.

The economics of tobacco are fast approaching the ultimate test of the theory of inelastic demand. Presumably, some commodities -- gasoline, heart medication, narcotics -- will remain in some level of demand even when the price surpasses its intrinsic value. A pack of cigarettes now costs roughly the same as a rock of crack. West Virginia has just become our back alley.

Strapped with a $2.5 billion deficit, shrinking revenues after a recession and soaring malpractice insurance costs, the Legislature and Gov. Rendell opted to raise everybody's income tax by 10 percent, and the tax paid by the 23 percent of Pennsylvanians who smoke, by 35 percent.

In some Pennsylvania retail outlets, a pack of cigarettes will be more expensive than a rock of crack. Choose your poison. This should offer a real test of market-driven solutions.

The state expects $255 million more in revenues from the cigarette tax increase. Orndoff doesn't think that dream will come true. A property tax jump might not drive people out of their homes, but customers are already crossing the state line for a smoking break.

On the day I visited, Ron Steavens was dropping $80.52 for four cartons of cigarettes. Steavens, a truck driver from Fayette County, is 61. When he started smoking, a pack cost 21 cents. That wouldn't even cover this year's tax increase on a pack. "I buy four cartons a month," he said. "My wife smokes, too. If it wasn't for her, I'd probably quit."

What is more likely is that Steavens will continue his monthly stop at Gumby's and start bumping into his neighbors. The store already has a steady clientele from Pittsburgh and it is not hard to imagine that many of them will be buying for friends after the newest tax kicks in.

"When you add a tax, that projected income isn't going to happen," he said. "It just exists on paper."

When it comes to tobacco, it is hard to tell whether legislators like to tax it because it is a carcinogen or because it is a pleasure. Since the Great Tobacco Settlement of 2001, Pennsylvania has factored a magnanimous $340 million annually into its budget. This money is generated by a price increase placed on cigarettes by the tobacco companies paying for the damage their product inflicts.

Since the days Big Tobacco and its leaders were caught in the polite fiction that tobacco does no harm -- something the dogs in the street knew after 1962 -- disapproval of smoking has become license to plunder. Rather than prosecute them for perjury, the government turned them into exile-free Robert Vescos. When Vesco fled to the Bahamas with money he stole from investors, the government simply squeezed him empty over the ensuing decades before sending him home.

The problem here is that we have too many governments to do the extorting. The federal government puts an excise tax on every pack. The Tobacco Settlement price increase is a de facto tax.

Now, with Pennsylvania's budget profoundly off plumb, and doctors threatening to flee because of onerous malpractice insurance costs, it seems easy to throw another 35 cents on each pack, offer $183 million toward the state's malpractice insurance fund, another $72 million toward the general budget and break for Christmas.

But Orndoff's theory of elusive revenues from the new tax makes sense. A pack-a-day smoker currently pays $365 a year in excise tax to the commonwealth. With the additional tax, that number now rises by another $127.75 yearly. But if that smoker calculates the cost of gasoline, gives up the hour necessary to obtain it and begins to cross the border, Pennsylvania doesn't simply lose that additional $127 a year. It loses the other $365 as well.

It's hard to tell if the tipping point has been reached, but we're getting close and even if we station state troopers at the border to track down cigarette smugglers, the law enforcement costs alone will offset the difference. This latest budget could become the model for proving how tax increases can lose existing revenue.

Certainly men like Orndoff are doubly happy. He is the football coach at West Greene School District just across the line in Pennsylvania. The board was preparing to shut the place down until the state straightened out its overdue budget.

"Now at least the kids can use the weight room," he said. They can use it, at least, until the next crisis.

He tells of the store near Chester, W.Va., where tour buses take senior citizens to Mountaineer Park and its slot machine parlors.

"All these old ladies will get off the bus and buy all these cigarettes," and here Orndoff's hand sweeps across the shelves, stocked to the ceiling, with cartons of cigarettes that sell from $10 to $15 less than a mile east in Pennsylvania. People on their way to bet on dog races and drop quarters in slots at Wheeling Downs stop at the Dallas Pike Store, sometimes leaving with armloads of cartons.

"They come in here and buy for everybody," he said.

What they buy is a lesson in the downward trajectory of tobacco in an age of sin tax. Marlboros, the most popular brand, go for $28.99 at Gumby's. (They sell for $33.50 at the Giant Eagle on the South Side -- Orndoff speculates they're not making money on that deal.) When that price becomes onerous, smokers shift to "generic" brands, such as USA Gold, at $22.99. Then comes another generic, Liggett's, which sell for $18.99 a carton. There are even brands called sub-generics.

"We have some as cheap as $15 a carton," Orndoff said.

This bizarre economics of flight is played out in other parts of the state as well. In Philadelphia, savvy drivers skitter down the highway to Delaware to beat the state tax. In Erie and other northern towns, drivers find their way to the Seneca Indian Reservation where neither federal nor state taxes can touch them. One source, who worked for the tobacco industry, told me he knows two guys who drive to Virginia, a state where tobacco is barely taxed, and load a trailer with cigarettes. The cartons are gone by the time the men reach New York, where "out of the trunk Newports" are a best-selling smoke.

Possibly the addition of casinos and slot machines in Pennsylvania will cut down some of the impulse buying by senior citizens in tour buses and working guys on a weekend jaunt.

But Orndoff notes that the tour buses and cars are, often as not, stopping at the Gumby's stores before they reach the slot parlors, while their passengers still have money for smokes. Precisely how much more will come in the guys in the back office at the company likely know better. Orndoff cautioned that he, for one, is not an accountant.

"I'm just a bald-headed guy that counts," he laughed. But as the counting goes, he seems to be on to some numbers that don't look good for a state that thought another tax on tobacco would solve something.

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