Michigan House OKs bill to freeze cap on cigar tax

Beth LeBlanc
The Detroit News

The Michigan House on Tuesday voted 83-25 to make the 50-cent cap on cigar taxes permanent ahead of it reverting to a higher tax rate in October.

Without the elimination or extension of the October sunset, Michigan would revert to a 32% wholesale tax on cigars — an increase that cigar shops said would drive more people to choose online or out-of-state retailers. 

Sales suffered during the pandemic, and an increased tax would further damage the industry, said Andy Hyde, president of the Michigan Premium Cigar and Pipe Retailers Association and co-owner of Nolan's Tobacco and Cigar Bar in Traverse City. 

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"This huge tax increase awaiting premium cigar retailers in October could be the death knell for an industry with deep historic roots and a vibrant future in our state," Hyde told lawmakers earlier this year.

The 50-cent per-cigar cap was put in place in 2012 to help Michigan cigar retailers compete with a growing online market that wasn't subject to the same excise taxes. 

The bill by state Rep. Matt Hall, R-Marshall, heads to the Senate next. The legislation is a reintroduction of a bill vetoed by Republican former Gov. Rick Snyder before he left office in 2018.

Snyder told lawmakers in a veto letter that he felt it was "appropriate to maintain the current expectation for expiration of the cap in 2021 and return the tax to 32% of the wholesale price."

That was before the pandemic, Hall noted, and before anyone knew the stresses state businesses would endure during a year of shutdowns and restrictions. 

"They’ve had significant challenges like many businesses," the lawmaker said. "I didn’t think this was the time to hit their product with a significant tax increase.”

The state Treasury is neutral on the bill, but the department acknowledged tax revenue had increased since the 50-cent cap was established in 2012. 

The Michigan Premium Cigar and Pipe Retailers Association estimated non-cigarette tobacco tax revenue increased about 30%, from about $60 million in 2012 to $95 million in 2019. The increase is proof the 2012 policy was effective, Hall said. 

"We’ve seen over the last 10 years that this tax policy has worked," Hall said. "We’ve had enough sample size. It’s time to extend it permanently.”

A House Fiscal Agency analysis found about 4.9 million "capped" cigars were sold in Michigan in 2018 and 2019 for about $21 million in wholesale prices each year. If that trend continues, sustaining the 50-cent cap beyond October would be mean about $4.3 million less in state revenue next year.

The bill is opposed by the American Heart Association and the American Cancer Society Action Network.