- The Washington Times - Wednesday, November 18, 2009

When President Obama signed a law expanding children’s health insurance this spring, he slapped tobacco companies with huge tax increases to pay for it.

It didn’t take long for the companies to find a multimillion-dollar loophole.

As soon as the new law took effect, raising taxes on roll-your-own cigarettes from $1.10 to $24.78 a pound, companies adapted. They all but shut down their roll-your-own brands and reinvented them under a less-restricted, less-taxed category: pipe tobacco. It’s still destined to be rolled and smoked, but it’s taxed at barely one-tenth of the roll-your-own rate — $2.83 per pound.

Pipe tobacco is normally too coarse and moist to roll into a cigarette, but nothing says it has to be. In fact, the Obama administration says the only distinction between pipe tobacco and roll-your-own tobacco is how it’s labeled, effectively giving tobacco marketing executives an opportunity to shape their own tax rate.

Nearly overnight, roll-your-own brands such as Criss Cross and Farmers Gold came off the shelves, replaced by pipe tobacco with the same names. The cuts may be slightly different, but they’re suitable for rolling. Knowing this, retailers steer customers to the new products, sometimes with a wink and a nod, sometimes with outright advertising.

“They tried to make a product within the elements of the law that they could, in fact, market as pipe tobacco,” said Scott Bendett, owner of Habana Premium Cigar Shoppe in Albany, N.Y., which advertises the new pipe tobacco for hand-rolled cigarettes.

Tobacco companies say they’re just trying to find a legal way to stay afloat after being saddled with an enormous tax increase. But both the Obama administration and some in Congress say they’ll try to come up with a distinction between the tobacco types, closing a loophole.

“If the companies won’t do what is right, then we will,” said Sen. Frank R. Lautenberg, New Jersey Democrat and a reliably anti-tobacco voice in Congress.

Because the small, independent companies in the roll-your-own market are often overshadowed by the huge, publicly held cigarette companies, the sudden shift toward pipe tobacco caught researchers by surprise.

Daniel Morris, who tracks tobacco-production data at the Oregon Department of Health, thought he had made a mistake when he saw April’s figures. Pipe tobacco production had more than doubled in a single month. After years of producing about 270,000 pounds per month, companies put more than 566,000 pounds of pipe tobacco on the market in April.

Over the next several months, the numbers climbed higher. In August, the most recent data available, pipe tobacco reached 1.7 million pounds, enough to roll more than 42 million packs of cigarettes.

The huge spike in production corresponded with a tremendous drop in the roll-your-own industry. Companies produced 660,000 pounds in August, down from an average of 1.5 million pounds before the tax.

“This is a direct challenge to the federal government,” said Matthew Myers, president of the Campaign for Tobacco Free Kids. As much as $32 million a month could be lost in taxes if the sudden spike in pipe tobacco is just cigarette tobacco in disguise.

Companies say they’re just trying to survive within the law. People buy roll-your-own tobacco because it’s cheap, so when Washington raised taxes 2,000 percent, pipe tobacco became the affordable option. For some, it was the only option.

“It allowed companies to stay in business, enough to keep paying the light bills,” said Cheryl Turner, vice president of M&R; Holdings, a small company in Pink Hill, N.C., which manufactures Farmers Gold.

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