NEW YORK -- A proposed federal tax increase on cigarettes could hurt tobacco companies' profits by an average of 5% if enacted, a Goldman Sachs analyst estimated over the weekend, according to an Associated Press report.
On Friday, the U.S. senate passed by a vote of 59-40 a proposed amendment to the 2008 budget. The amendment, sponsored by Sen. Gordon H. Smith of Oregon, would raise taxes on cigarettes by 61 cents per pack. The tax revenue would finance the State Children's Health Insurance Program, according to the report.
Goldman Sachs analyst Judy E. Hong said the odds the amendment takes effect are uncertain. First the budget has to pass, which is likely, but the amendment also needs to pass as a standalone bill or a provision in another bill. The legislation needs 60 votes to pass, which is one more than the bill received Friday, AP stated.
If the legislation takes effect, Hong said cigarette manufacturers will probably raise their manufacturing list prices to recoup the tax. That could force up retail prices by about 17%, Hong said, which would hurt earnings at Altria Group Inc., Reynolds American Inc. and Carolina Group.
Hong didn't cut her earnings estimates because of the uncertainty the legislation will pass.
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