The amendment would reclassify tobacco shops that offer the machines as “tobacco manufacturers,” imposing on them new regulations and higher taxes, and it opens a window into the ways of Washington, where the powerful and the connected can sometimes win even before the opposition knows the game is underway.
“This is catastrophic,” was the response of Phil Accordino, whose tiny company builds the roll-your-own cigarette machines in Girard, Ohio, when he heard of the Senate action. Word arrived in Ohio after the amendment had already been approved on a bipartisan vote.
Officials with the tobacco companies, and allies who include some public health advocates, counter that they’ve been trying to crack down on ultra cheap and unregulated cigarettes, which they contend skirt tax and health laws.
Sen. Max Baucus (D-Mont.), who sponsored the Secure Rural Schools amendment, said that the $346 million program supports schools and road projects in Montana and elsewhere. He said the $97 million tobacco provision helps provide “critical funding” for the program by closing a loophole that some smokers have been using to avoid taxes.
Enjoying a tax loophole
“Roll-your-own cigarette machines take advantage of an unintended tax loophole, and that isn’t right, so this offset closes it,” he said in a statement.
But Accordino says the case illustrates how corporate America can quietly use its political influence in Washington to secure wins on the business battlefield.
He acknowledges that his corner of Little Tobacco, which has come under scrutiny from several state attorneys general, might not make for the most sympathetic poster child to talk about the ills of Washington. But he contends it was unfair that he lost his fight on the highway bill before he even knew it had begun.
“I don’t expect sympathy, but this is just big business influencing legislation through their dollars. . . . They want us gone, and they’re capable of paying to get us gone,” he said.
Despite the decline in the popularity of smoking, tobacco companies remain prolific campaign donors and aggressive lobbyists on Capitol Hill. The Altria Group, which used to be Philip Morris, spent $11 million on lobbying last year.
Individuals and political action committees associated with the company have since 2007 given $30,000 to Baucus and his PAC, according to the Center for Responsive Politics.
A spokesman for Altria, the nation’s largest cigarette maker, and the president of Liggett Vector Brands, the fourth-largest company, confirmed that they have been lobbying for congressional action on the roll-it-yourself machines, and say they have a compelling case to make.
Whether Washington’s mechanism for addressing the issue was fair to their opponents, they say, is Washington’s problem.
“I’ve got to be honest with you: That’s a question for members of Congress, not the company,” said David Sutton, a spokesman for Altria.
Accordino’s RYO Filter Station company makes ATM-sized machines that enable consumers to turn loose tobacco into a carton of cigarettes in about eight minutes. In some ways, the device is like the communal coffee grinder offered at many grocery stores to customers picking up a pound of coffee beans.
He sells the machines — 1,900 in 42 states — for more than $30,000 a pop to tobacco stores. He said they mostly cater to people who have long rolled their own cigarettes at home and enjoyed exemptions from many tobacco regulations.
Ultra cheap smokes
The shops sell tobacco and rolling tubes and rent time with the devices to customers. They’re not allowed to resell the cigarettes, but the end product is much cheaper than buying manufactured smokes. Customers can get a carton of cigarettes at Accordino’s Ohio store for $25. A carton of Marlboros there can cost as much as $55; discount brands sell for $32.
In part, the low price is Congress’s fault, too. In 2009, Congress funded an expansion of a children’s health-care program by dramatically raising federal taxes on cigarettes. But it raised taxes on pipe tobacco only by a little.
Since then, sales of pipe tobacco — some of it virtually indistinguishable from loose cigarette tobacco — have risen sevenfold. Many smokers use Accordino’s machines to roll pipe tobacco into ultra cheap cigarettes.
“The fact of the matter is that all of the growth they’ve realized is only possible because of the use of mislabeled tobacco. . . . Without the evasion of the taxes, this wouldn’t work,” said Ron Bernstein, president and CEO of Liggett Vector Brands, a division of Vector Group.
Kathleen Dachille, director of the Center for Tobacco Regulation at the University of Maryland law school, said cheap cigarettes hurt public health by removing an incentive for people to quit smoking. Congress had reason to act, she said.
“There’s a reason we have high taxation and high regulation of cigarettes in this country,” she said.
The most straightforward way to close the loophole would be to raise the federal tax on pipe tobacco to the same level as cigarette tobacco. Accordino said he would not object to that.
But in a gridlocked Washington, that might appear to be a tax increase. Instead, the language inserted into the rural schools amendment — made public on the morning of the Senate vote — would reclassify any shop that offers the use of one of RYO’s machines as a “tobacco manufacturer.”
The new label would subject the shops to a series of federal and state regulations, including the application of health labels to the loose cigarettes and separating retail and manufacturing areas.
“I don’t see how I’d do it,” said Laneia Horton, who borrowed money to open Roll Your Own Tobacco in Virginia Beach a year ago and employs two clerks. Zoning laws would not allow manufacturing in her shop, she said.
Accordino said that demand for his machines would dry up and he’d be forced out of business. Gone would be his new factory, which employs 35 workers in a corner of Ohio hit hard by steel mill closures.
Same rules for everyone
Dachille and others contend that retailers should be subject to the same rules as everyone else who makes cigarettes — the same taxes, the same fire safety codes, the same requirements to provide health warnings.
The two sides are fighting the same battle in 20 statehouses around the country. And Accordino’s company has sued federal regulators over the issue.
In court, a judge will hear Accordino’s side. In most statehouses, his lobbyists can present his case, often in open hearings. But if the Senate’s highway bill passes the House unchanged, the issue will be settled.
“We were blindsided by this,” Accordino said. “We expected them to continue this fight, yes. We didn’t expect this.”
An aide for the Senate Finance Committee, which handles tax issues and which Baucus chairs, said that discussions about the issue began long before the highway bill.
Congress’ deficit-reduction supercommittee, which met in the fall, quietly looked at ways to raise revenue by closing the tax loophole, as did negotiators looking for ways to pay for an extension of the payroll tax cut this year.
The aide said the item was included in the highway bill to help offset the cost of a program that provides a lifeline to counties for schools and roads, payments that make up for revenue lost to reductions in timber harvests because of federal environmental regulations. The item was chosen, the aide said, because it was good policy and could win support from both parties — not because it had tobacco industry support.
“Disguising one kind of tobacco as another simply to evade taxes just isn’t right, so our amendment helps fix that problem while maintaining funds that keep teachers in classrooms and improve county roads,” Baucus said.
Dachille said she has little sympathy for Accordino and his company.