Taxes Blog

Finance Blogs » Taxes Blog » Tobacco taxes cost Uncle Sam billions

Tobacco taxes cost Uncle Sam billions

By Kay Bell ·
Thursday, July 31, 2014
Posted: 4 pm ET

Tobacco taxes have been credited for helping reduce the number of cigarette smokers, especially among young people.

© Yuriy Kulik/

That's good from a health perspective.

But from a financial standpoint, the tobacco tax hikes have cost Uncle Sam billions, according to a new report from the Government Accountability Office, or GAO.

The GAO estimates that between April 2009 and February 2014, the U.S. Treasury lost between $2.6 billion and $3.7 billion because of the lower taxes enacted in 2009 as part of the Children's Health Insurance Program Reauthorization Act, or CHIPRA.

Fewer smokers, however, weren't the major reason for the lost tax money.

Different tobacco tax rates

The GAO, which discussed its report at a Senate Finance Committee hearing July 29, says the fiscal problem is due to the disparity in various smoking product taxes.

CHIPRA raised tax rates on all types of tobacco, notes the GAO, but the increase was smaller for pipe tobacco and large cigars. That not only encourages smokers to buy the cheaper products, but the GAO investigation also found that the taxes prompted some tobacco companies to shift production to the lower-taxed tobacco.

"Each of the three tobacco manufacturers that agreed to speak with us explained that their companies switched from selling higher-taxed roll-your-own tobacco to lower-taxed pipe tobacco to stay competitive," according to the congressional watchdog agency's report.

Annual sales of domestic and imported pipe tobacco increased from about 5.2 million pounds before CHIPRA to 43.7 million pounds, says the GAO. Meanwhile, sales of domestic and imported roll-your-own tobacco declined after the law's enactment from about 21.3 million pounds to 3.8 million pounds.

Lower cigar tax, too

Small cigars also got a boost from the CHIPRA tax changes.

Weight determines whether a tobacco product is classified as a small cigar or as a lower-taxed large cigar. The GAO reports says that because many small cigars already weighed close to the tax threshold, many manufacturers legally shifted the product to the lower-taxed large cigar category with minimal changes to their products.

During the Senate hearing, the GAO also noted that less reputable makers mixed in clay or kitty litter to increase product weight to get to the lower tax.

Tax loophole closure sought

While questionable industry production practices definitely are an attention grabber, the real problem is the tax law.

"Sales of pipe tobacco have skyrocketed -- more than tenfold in just five years, " said Senate Finance Committee Chairman Sen. Ron Wyden, D-Ore., in his statement opening the hearing. "It seems implausible that so many more Americans would suddenly start smoking pipes."

No changes to the disparate tobacco tax rates were suggested either during the Finance Committee hearing or in the GAO report. Wyden, however, says that's on his to-do list.

"My bottom line is that this loophole hurts taxpayers and kids, and it needs to be closed," says Wyden.

Have tobacco taxes affected your smoking habit? Have you switched to different cigarette brands or changed to cigars or pipes? Or have you quit smoking altogether because of the increased cost?

More tax info from Bankrate

Want the latest news on taxes, tax reform prospects, filing deadlines, IRS alerts and tax-saving tips? Subscribe to Bankrate's free Weekly Tax Tip newsletter.

You also can follow me on Twitter: @taxtweet.

Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and co-author of the e-book "Future Millionaires' Guidebook."

Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
August 03, 2014 at 11:21 pm

Those bums in Washington would misuse the money if we all gave them every cent we have. Leave the tobacco alone and figure out how to decrease the deficit, get people working (so they can buy stuff and pay taxes ), and bring America back to the economic giant it used to be. I live in Illinois and this state has one of the worst financial pictures of any state in the country. Yet they tax the hell out of tobacco and everything else. I can go o Indian for my purchases, but many people can't yet the politicians claim to have their best interest at heart. I hope all the Americans companies follow the lead of Walgreens and leave this stat and or this country. Maybe then the voters will wake up

August 03, 2014 at 11:03 pm

The problem is that society ( gonernment) thinks that they need to take care of people who make stupid decisions. They try to absolve peoople of responsibility of their actions. That is what they are trying to do with a lot of government programs but it really shouldn't be the government's job.

August 03, 2014 at 9:58 pm

How about we start acting like a "free" country once again; by not taxing people for every reason possible, quit trying to control every choice an adult rightfully makes, and stop legislating away our "Life, Liberty and the pursuit of Happiness".
The average person, nowadays, is so concerned about trying to fix what they consider wrong with everyone else, that they never stop to fix what is wrong with themselves.

August 03, 2014 at 8:23 pm

As a smoker I have tried ever thing to stop and cant. I am probably in the majority when I say I can barely afford my habit. It really irritates me that we are being targeted to cover shortfalls for social issues like child health care when we are a social issue ourselves. Don't sit around the shanty making worthless future welfare children you can't afford or take care of. We got a few loopholes to make smoking less expensive. Don't close them. Right now the anti smoking money hauling pigs are going after nicotine vaping which can't be proven to cause the same issues as regular cigarettes. A lot of people are moving to this and the needy are scared. Little Sally 90 IQ needs her therapy.

Dev Davis
August 03, 2014 at 5:51 pm

Misleading and poorly written article. Does not talk about the fact that this Excise tax has made the tobacco industry move overseas and has stopped all USDA support to farmers where money would have stayed in our communities. People who want to smoke will do so anyway.

August 03, 2014 at 5:14 pm

The Government has no money and can then make no money. It is the US Taxpayers money we foot the bill and taxes are herendous and outrageous if the Government can not get it done right I say fire them all and employ news ones to do the job

James Horn
August 03, 2014 at 4:54 pm

More Government manipulation of figures. There is no way that taxing people costs money, it is a myth, a joke designed to appeal to the uneducated and uninformed.

August 03, 2014 at 4:49 pm

The anti-tobbaco people complained about the smoke in buildings, then the smoke at the entrances, then tertiary smoke. If secondary smoke caused cancer, they gen. over 60 would be dying in the droves of cancer. We were all exposed to it back then.
Let Americans do as they please. It is a right to behave stupidly. a properly smoked cigar is not inhaled nor chewed yup on to cause tobacco to enter one’s mouth.
Tobacco taxes are just likeRed Light cameras. They are to protect the public from ??? Just another hidden tax. The do gooders are here to “Help” you.

August 03, 2014 at 4:25 pm

I agree. If someone greets you with "I'm from the government and I'm here to help" RUN AS FAST & AS FAR AWAY AS YOU CAN!!!

August 03, 2014 at 3:58 pm

I just thought that a non-smoker, but with a different attitude should voice his opinion just once. That is if you really wanted to hear it, but here goes. If a person chooses to smoke or ride without the use of a seatbelt that is his choice, BIG brother (government)should not be able to dictate what one can or can not do.