Passage of Proposition B, which would substantially raise the tax on a pack of cigarettes in Missouri, would be credit negative for cigarette manufacturers, Moody's Investors Service says in a report.

The ballot initiative will come before the public on 6 November.

"The passage of the ballot, which would raise the tax on cigarettes to $0.90 from $0.17 per pack, would likely lead to lower cigarette sales as manufacturers pass the tax on to Missouri's approximately 1.1 million smokers," says Janice Hofferber, senior vice president and author of the report "US Tobacco Industry: Showdown in the Show-Me State: Big Tobacco Faces an Excise-Tax Hike."

"All cigarette manufacturers would be affected, including the "Big Three" -- Altria Group, Reynolds American and Lorillard Tobacco Co.," she said.

Missouri currently has the lowest tobacco tax in the US, Hofferber says. And that is largely because the tobacco industry has spent heavily to defeat tobacco-tax referendums in the past. This time, however, they are holding off, because Proposition B would also close a legal loophole that has allowed generic manufacturers to avoid making payments under the 1998 Master Settlement Agreement.

"In addition to the higher state excise tax, Proposition B would slap a 0.57-per-pack payment on generic and deep-discount manufacturers, removing their price advantage over the largest manufacturers," Hofferber says.

The financial impact, however, would be manageable for cigarette manufacturers, since Missouri represents less than 3% of total US cigarette sales. Further, the Big Three would gain pricing power once their generic counterparts are forced to make payments under the Master Settlement Agreement.

Proposition B has a good chance of passing, Hofferber says, primarily because the major manufacturers are not spending millions to defeat it. In addition, the measure devotes a large percentage of the tax to school districts and higher education, uses that are popular with the public. Missouri would also gain increased funding for healthcare costs associated with smoking-related illness by closing the Master Settlement Agreement loophole.

And public opinion in the state may be shifting against smoking. Hofferber notes that since the 2006 referendum failed, large municipalities including St. Louis, Kansas City and Springfield have passed strict smoking bans. Nonetheless, if the proposition passes, other states are unlikely to follow suit, since Missouri is one of just three states that has not had an excise tax increase since 1999.

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