GAO Suggests Equalizing Tobacco Tax Rates

A new report finds shift in using pipe versus roll-your-own tobacco and large cigars versus small cigars to avoid hefty taxes.

This week, the federal Government Accounting Office (GAO) issued a report titled “Large Disparities in Rates for Smoking Products Trigger Significant Market Shifts to Avoid Higher Taxes.”

The document shows the impact of the different federal tax rates on various tobacco products as a result of the federal cigarette and tobacco tax increases which went into effect on April 1, 2009, the National Association of Tobacco Outlets (NATO) reported.

The report further found that market shifts are causing revenue losses for the federal government and recommended that Congress should consider equalizing tax rates on roll-your-own and pipe tobacco.

Market Shifts
Below is a chart that shows the federal excise tax rates on tobacco products before and after the April 1, 2009 tax increase:

ProductFederal Tax Rates Through March 31, 2009Federal Tax Rates on April 1, 2009
Cigarettes39¢ per pack$1.0066 per pack (Rounded to $1.01/pack)
Large Cigars20.719% of manufacturer’s price; cap of 4.875¢/cigar52.75% of manufacturer’s price; cap of 40.26 cents per cigar
Little Cigars4¢ per pack$1.0066 per pack (Rounded to $1.01/pack)
Pipe Tobacco$1.0969 per pound$2.8311 per pound
Chewing Tobacco19.5¢ per pound50.33¢ per pound
Snuff58.5¢ per pound$1.51 per pound
Roll Your Own; Cigar Wrappers$1.0969 per pound$24.78 per pound
Cigarette Paper1.22¢ per 50 papers3.15¢ per 50 papers
Cigarette Tubes2.44¢ per 50 tubes6.30¢ per 50 tubes

The GAO noted monthly sales of pipe tobacco increased from about 240,000 pounds in January 2009 to more than three million pounds in September 2011. Monthly sales of roll-your-own tobacco, meanwhile, decreased from approximately two million pounds to 315,000 pounds in the same time frame.

Similarly, large cigar sales rose from 411 million cigars to more than one billion cigars, while small cigar sales declined from about 430 million cigars to 60 million cigars.

The report showed that given these market shifts in pipe versus roll-your-own tobacco and large cigars versus small cigars, the federal government experienced revenue losses of between $615 million and $1.1 billion in tobacco taxes.

The GAO report recommended that Congress “should consider equalizing tax rates on roll-your-own and pipe tobacco and, in consultation with Treasury [the U.S. Treasury Department], consider options for reducing tax avoidance due to tax differentials between small and large cigars.”

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