Dubek Fumed, Finance Committee Held Up Decision on Increasing Cigarette Tax

Dubek can claim a victory, temporarily at least: The Knesset Finance Committee held back from formally approving the increase in tax on cigarettes yesterday. Committee chairman Moshe Gafni delayed the vote to give the cigarette manufacturer more time to reach understandings with the Finance Ministry about the nature of the tax increase.

In fact, cigarette prices were raised in July after tax was increased through a temporary measure. But the temporary measure was never formally approved as a permanent one by the Finance Committee. If the committee ultimately decides to forgo approving the increase retroactively, cigarette prices will drop again.

Behind the delay in voting on cigarette tax is a struggle between the Israeli cigarette manufacturer Dubek and the company importing Philip Morris cigarettes. Both types of cigarettes, locally made and imported, are liable to NIS 4.30 tax per pack - plus a tax relative to the price per pack.

The temporary order increased the price of Dubek cigarettes from NIS 14.50 per pack to NIS 16. The price of imported cigarettes, such as Marlboro, rose from NIS 19.70 to NIS 22.00. (Note that cigarette prices are not under government supervision. )

Dubek argued that the fixed tax should be increased by a lesser degree, and that the price-based tax should be raised by more, to minimize the damage to itself from the increase. Its representatives argued that the current proposal favors importers, whose share of the market is about 80%.

Philip Morris' representatives demanded that the increases stay as they are in the temporary order.

Dubek hired the lobbying firm Goren-Amir in hopes of persuading Knesset members in its favor. Philip Morris hired the lobbying firm Policy.

Knesset sources say a compromise will probably be found, under which the fixed-rate tax, which should be revised in January 2011 anyway, will be amended by less than the increase in the consumer price index since the last update.

The committee also put off voting on an injunction to impose a tax, amounting to NIS 2.50 per liter, on biodiesel. The tax, if eventually approved, is expected to add NIS 200 million to tax revenues a year.

Gafni suggested that Finance Ministry officials discuss the matter of cigarette tax with Dubek's people by tomorrow, in the hope of finding a formula that would lessen the harm to the company. Evidently he favors higher tax on the vice - but also protection for local industry. "If the state's revenues from tax need to be increased, it's better to do it by raising tax on cigarettes and canceling the exemption on biodiesel," Gafni said yesterday. "However, we do not accept that en route, Israeli factories get hurt."

Shelly Yachimovich (Labor ) argued that the Dubek workers need protection. "Protecting Israeli jobs is my top priority," she said during the committee debate.

Yehuda Nasradishi, head of the Tax Authority, said that the last time cigarette prices had been increased, he personally made sure the increase was balanced between Dubek and the importers. "I do not want to discriminate against local manufacturing, but I don't want that kids can take NIS 15 and go buy cigarettes," he said.