Cigarette Markup Would Nearly Double Under Lawmakers’ Proposal

Tennesseans would pay more for their smokes under a bill working its way through the General Assembly.

The measure, SB788/HB644, would increase the amount Tennessee retailers are required to mark up cigarettes from 8 percent to 15 percent of cost. It would be the first change to the requirement since 1950. 

“The Legislature in the past has passed the cigarette minimum markup law to prohibit retailers from using cigarettes as a loss leader and to discourage consumption of cigarettes, including, of course, underage usage of cigarettes,” state Rep. Matt Hill, R-Jonesborough, said in a House Agriculture Subcommittee meeting Feb. 27.

“Unfortunately, we’ve had some large, out-of-state cigarette manufacturers who have come in and used the minimum price laws by contractually requiring our convenience stores, primarily, and other retailers to sell tobacco products at or near the state minimum.” 

A “loss leader” is a good sold at or below its market cost in order to stimulate the sales of other, more profitable goods.

The bill would provide relief from a situation, created in part by the state, that crimps revenue for tobacco retailers, said Senate sponsor Rusty Crowe, R-Johnson City.

According to Sen. Jack Johnson, R-Franklin, pricing pressure comes from the top down with “quasi-monopolistic” manufacturers compelling retailers into pricing contracts, which push prices down toward the state minimum. Johnson chairs the Senate Commerce and Labor Committee, which passed the bill unanimously Wednesday.

Two companies in the state own 80 percent to 90 percent of the state’s market share of tobacco, according to Emily LeRoy, the executive director of the Tennessee Fuel & Convenience Store Association. Their outsize role contributes to the pressure on operators to either sell cigarettes nearly at a loss or simply not carry those products, LeRoy said.

In the Senate hearing, both Bo Watson, R-Hixson, and Reginald Tate, D-Memphis, questioned why the state was responsible for setting a mark-up rate at all. 

Answer: Protecting children.

Setting the price helps prevent “age-sensitive” products, such as tobacco, alcohol and lottery tickets, from being “among the so-called loss-leader products, Johnson said in the hearing. He added that it is also in the state’s interest to deter smoking.

A 2011 Gallup ranking of smoker-percentages by state put Tennessee at No. 8 in the country. Kentucky was No. 1. Alabama No. 9.

“I don’t know, but I see the poorest people are mostly the ones that smoke, and they’re going to smoke no matter what, and it takes that much out of their family’s budget,” said state Sen. Charlotte Burks, D-Monterey. She ended up voting for the measure.

The bill passed the House agriculture committee on a voice vote, with Rep. Billy Spivey, R-Lewisburg, requesting to be recorded as voting no.

The bill’s next stop is the Finance Committee in both chambers. According to Crowe, the measure will boost local revenue but cause a decrease in state revenue.