Massachusetts smokers, already bracing for a 75-cents-a-pack tax increase on cigarettes that is making its way through the Legislature, may be in for another price shock this summer.

Starting July 1, the state intends to prohibit cigarette manufacturers from offering retail discounts that in recent months have averaged about 60 cents a pack. Officials say the combination of the tax increase and the discount prohibition could make Massachusetts cigarettes the most expensive in the country, boosting their current price by 30 to 35 percent.

''It's a huge price increase for consumers,'' said Thomas Ryan, a spokesman for Philip Morris, the manufacturer of Marlboros.

State lawmakers are counting on the higher cigarette taxes to help balance the budget, and antismoking advocates are hoping the higher prices will persuade many smokers to kick the habit. But many retailers who sell cigarettes worry that the higher prices will end up driving smokers looking for less expensive cigarettes to the Internet or to New Hampshire, with disastrous consequences for their businesses. The New England Convenience Store Association, for example, says its members derive 33 percent of their revenue from cigarette sales, with cigarette buyers accounting for a large portion of other purchases as well.

Expensive habit

If a 75-cent tax increase is approved and the Revenue Department prohibits retail discounts, Massachusetts could have the most expensive cigarettes in the country July 1.

''You could deal a crippling blow to an awful lot of the small retailers in this state,'' said Representative Paul E. Caron, a Democrat from Springfield who has tried unsuccessfully to block the discount prohibition and is now seeking a delay in enforcement.

Cigarette manufacturers are also alarmed. The Department of Revenue's decision to use a 1945 cigarette fair-pricing state law to prohibit retail discounts represents a direct attack on one of the industry's top promotional strategies.

Over the past 20 years, cigarette makers have steadily reduced expenditures on traditional forms of advertising such as magazines and billboards and poured money into promotional allowances, primarily payments to retailers to discount prices and provide more shelf space and better signage.

According to a recent report from the Federal Trade Commission, the tobacco industry spent $3.91 billion on promotional allowances in 2000, up 10.9 percent from the year before. Promotional allowances accounted for nearly 41 percent of all tobacco advertising and promotional expenditures in 2000.

''Massachusetts is the only state that has interpreted minimum pricing in this manner,'' said Ryan, the Philip Morris spokesman. ''We disagree with their re-interpretation of the law.''

Ryan said it's likely the discount prohibition will result in sharply higher prices for smokers in Massachusetts, but he acknowledged the company is looking at alternative ways to continue discounting its product.

''It's a very important part of our business,'' he said.

Assuming the Revenue Department's new policy becomes effective on July 1 and Philip Morris doesn't come up with an alternative discounting scheme, the price of a pack of Marlboros will go up dramatically.

At a CVS Pharmacy in Dorchester yesterday, the price of a pack of Marlboros was $4.19, including the state's 5 percent sales tax. Without the 60-cent retail discount, it would rise to $4.82, an overall increase of 15 percent.

If the 75-cent-a-pack excise tax increase approved by the House is passed by the Senate and signed into law by the governor, the same pack of Marlboros could jump to $5.61, including sales tax, an overall increase of nearly 34 percent.

Officials at the Department of Revenue say they have no secret agenda to drive up the price of cigarettes. They say it is mere coincidence that they plan to start enforcing their interpretation of the fair pricing law at the same time the Legislature is moving to increase the existing cigarette excise tax of 76 cents to $1.51.

Most smokers in Massachusetts are not aware there is a state law requiring a minimum retail price for cigarettes. The so-called fair-pricing law was intended to prevent a retailer from slashing his cigarette prices to drive competitors out of business.

Robert Kalell, a director in the Revenue Department's audit division, has the job of calculating the minimum retail price. He takes the invoice price paid by the cigarette wholesalers, adds in delivery costs, a markup for the wholesaler (0.5 percent to 2 percent), and a markup for the retailer (25 percent). Using the state's formula, the current minimum price for a pack of Marlboros is $4.52 at a nonchain store and $4.46 at a chain store. Neither price includes the state's 5 percent sales tax.

Kalell has been calculating the minimum price for a pack of cigarettes for close to two years, and over that time has observed that almost every retailer charges considerably less.

At a CVS Pharmacy yesterday in Dorchester, for example, a pack of Marlboros was on sale for $3.99, plus another 20 cents in sales tax.

Retailers such as CVS are able to charge less than the official minimum retail price because they receive payments called buy-downs from cigarette manufacturers that allow them to cut their retail price. Kalell said the average buy-down has increased from 10 cents to 20 cents a pack several years ago to an average of about 60 cents today.

The buy-downs apparently vary from retailer to retailer and differ in duration. But because most manufacturers match each others' buy-downs, the result is that cigarettes are almost always being discounted.

''I began to ask myself why I make these calculations when no one pays attention,'' Kalell said.

He and his superiors at the Revenue Department eventually concluded the buy-downs were violations of the fair pricing law for cigarettes. They are also reviewing the legality of special coupon offers, as well as buy-one-get-one-free promotions.

Cigarette manufacturers could legally reduce their retail prices by discounting the price they charge wholesale distributors, but to date they have resisted that approach. They have preferred to deal directly with retailers to gain greater control over how their product is marketed and sold.

Bruce Mohl can be reached at [email protected].

This story ran on page A1 of the Boston Globe on 6/5/2002.

© Copyright 2002 Globe Newspaper Company.