City Controller’s Testimony Regarding Health Board’s Tobacco Regulations

Office of the City Controller
City of Philadelphia
Testimony at the Committee on Commerce 
and Economic Development
March 7, 2017

Good afternoon Chairman Jones and other members of the Committee on Commerce and Economic Development.

I am Alan Butkovitz, Philadelphia’s City Controller, and I am here today to provide remarks regarding Resolution No. 170057, concerning the Board of Health’s recent regulations relating to the Tobacco Retailing License and the impact on local businesses.

As part of my Office’s November economic report, we analyzed the revenues the School District of Philadelphia received from the $2-per-pack Cigarette Tax implemented October 2014. We found that total revenues have been declining since the tax was imposed.  The monthly average collection fell from from $5.6 million in the first year, $5 million in the second year, and down to $4 million in the current collection year – Fiscal Year 2017.

When the Cigarette Tax was implemented, the City initially projected that $75 million would be collected in Fiscal Year 2017. After realizing the decrease in revenues, the School District revised their budget projection this year down to $55 million.  However, as we indicated in our monthly report, the actual collection is on track to reach about $49.5 million, which is still below the amended projections.

The decline in Cigarette Tax sales has been realized at both the state and city level. However, when comparing sales for the first half of the last two years, Philadelphia has realized a much steeper decline at 23 percent, compared to the state’s decline of 11.5 percent.

We determined that if Philadelphia’s smoking patterns were similar to the rest of the state, half of Philadelphia’s decline could be a result of people buying cigarettes outside of the city.

Fortunately, legislators in Harrisburg amended their law to allow for the state to make up the difference between what is collected in the City and $58 million, to make sure the District is whole.  This means that if our current projections are accurate at almost $50 million, the state will have to provide $8 million this year to make up the difference.

Unfortunately, while they included this dedicated funding portion into their legislation, it also means they can amend the law at any time and leave Philadelphia out of millions of dollars from Cigarette Tax revenues, especially if additional regulations are placed on businesses selling these products.

With that said, we believe the Board of Health’s new tobacco density rules would directly impact about 500 stores with tobacco licenses that are currently within 500 feet of a school.  It would also reduce the current number of licenses per resident from 2.2 to 1 per thousand residents. This would reduce the number of total licenses by up to an additional 1,200 – for a total impact of more than 1,600 tobacco licensed retailers.

While current license holders are grandfathered into the new regulation, their inability to sell the licenses decreases the asset value of their store.  According to the National Association of Convenience Stores, tobacco products are 36 percent of in-store sales.  Ultimately, this could mean that they have lost 36 percent of their business and almost impossible to sell a license that no longer can generate these sales.

The real question is both philosophical and practical: can we allow an unelected body like the Board of Health unfettered power to dramatically impact the value of a small business owner’s property?

I believe this model sends the wrong message to our business community – whether it’s regarding a Tobacco license or any business license.  A significant value of tobacco retailers is based on their ability to sell their business someday to the next person who wants to operate the store in the same manner.

If the City exercises eminent domain, it has an obligation to pay fair market value to affected property owners.

Why should this case be any different?

Thank for the opportunity to testify today.