Citi’s tobacco team is out with their massive 114-page “Annual Cigarette Synopsis” note on the state of the global tobacco industry.
For anyone wondering why cigarettes cost more or less in one state versus the other, the explanation is pretty simple: taxes.
And they may be going up. From the report:
Taxation – Possible Challenges Ahead. The major manufacturers expect a somewhat more challenging SET [state excise tax] environment in 2012, relative to the benign one seen in 2011. On a weighted-average basis, RAI [Reynolds American] expects the SET rate to increase $0.05 to $0.10 pp, or +3% to +7%, relative to the $1.36 pp SET average seen in 2011.
Indeed, year-to-date, we have seen legislation for excise tax increases proposed in 13 states (though several have already failed, notably in Florida, Mississippi and Virginia), and decreases proposed in two states. Of note, a ballot initiative in California would increase the SET by $1.00 pp (+115% from the current rate of $0.87 pp), which alone would increase the weighted-average SET rate by $0.07 pp (+5%). The vote on the initiative (Proposition 29) takes place on June 5, 2012.
Assuming no changes to the volume contributions by state, we estimate that the best-case scenario for 2012 to be a roughly 3% decline in the weighted- average SET rate, and an 18% increase in the worst-case scenario.
Photo: Citi Investment Research & Analysis
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