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