Tax increase rankles tobacco growers

The Associated PressApril 3, 2009 

— For more than a century, the Sharp family of Eastern North Carolina has grown tobacco, nicknamed the "golden leaf" for reasons that went beyond the cured plant's rich color.

But this week, the federal tax on a pack of smokes more than doubled. Pender Sharp says cigarette makers had already cut back orders in anticipation, leaving him to wonder whether Sharp Farms and thousands of fellow growers across the South will be forced to hire fewer seasonal workers or lay off full-time employees.

Driven in part by bans on public smoking and the relentless efforts of health advocates, cigarette sales in the U.S. were already expected to drop 4 percent this year. Industry analysts say the decline could be twice that after an increase in the federal excise tax from 39 cents to $1.01 per pack took effect Wednesday.

Growers say some tobacco buyers are cutting back orders by as much as 25 percent and, in some cases, trying to renegotiate existing contracts to buy less than originally agreed. Sharp says Philip Morris USA and Reynolds American cut orders for his crop by 5 percent after the tax increase passed in January.

"It also will be a 5 percent cut to all the vendors that I buy tires, fuel, repairs and equipment from. It has a huge ripple effect in the community," said Sharp, who raised 1.5 million pounds of tobacco on 500 acres last year. "There's nothing else we're doing that comes even close to yielding the profits that tobacco yields."

For generations, tobacco growers were protected, as lawmakers across the South defended the golden leaf as stridently as politicians from Michigan and New York do automakers and Wall Street. It remains a huge business: The tobacco crop in North Carolina alone, where farmers produce nearly half the value of the entire U.S. output, was worth $686 million last year.

But lawmakers don't look out for Big Tobacco as they once did. In 2004, Congress eliminated a tobacco quota and price support system that dated to the Depression. On Thursday, the U.S. House approved legislation that for the first time would give the government powers to regulate tobacco products.

In Raleigh, where there were spittoons in the legislative chambers until the mid-1980s and a smoky haze in the halls until a few years ago, House members voted this week in favor of a limited ban on public smoking. They're also considering a once unthinkable $1 per pack increase in the state tobacco tax, which until 2005 was a nickel.

In her first month in the U.S. Senate, Kay Hagan, a North Carolina Democrat, railed against the tax increase, which will pay to expand a children's health insurance program, saying it could cost the state 3,000 jobs and up to $36 million in revenue.

She voted for it anyway, citing her support for the health care program, a decision tobacco growers like Sharp have trouble understanding.

"If we have programs and services that are necessary and good for all the people of North Carolina and all the people in this nation, then let all the people pay for it," Sharp said. "Don't target a few tobacco growers and consumers of tobacco products to pay for programs and services that benefit all of society."

It's a blow felt in the sandy soil fields of Eastern North Carolina that are just OK for sweet potatoes, cotton and soy beans but fantastic for tobacco. Production dropped by 27 percent to about 645 million pounds in 2005, the year after the quota system ended, but has slowly recovered, boosted by exports and new marketing tactics.

Stanley Smith, who grows about 50 acres of tobacco in Stokes County near the Virginia border, bristles at the sharp increase in the cigarette tax.

Still, along with the leaf he sells for export, he's experimenting with a purple sweet potato that's rich in antioxidants and sold in upscale groceries. For the past few years, he's been among former quota beneficiaries receiving annual payments to help them retire or ease into a new crop.

"The tobacco farmers in the United States are receiving money under the Tobacco Transition Payment Program, which tells us through that name that we need to transition from tobacco into something for the future," he said.

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