Senators Introduce Legislation to Close Tobacco Tax 'Loopholes'

Would create tax parity for all tobacco products at same per-unit level as cigarettes

WASHINGTON -- U.S. Senators Dick Durbin (D-Ill.), Frank Lautenberg (D-N.J.) and Richard Blumenthal (D-Conn.) have introduced the Tobacco Tax Equity Act to close loopholes in the tax code that allow tobacco companies to avoid the federal cigarette and roll-your-own (RYO) tobacco tax.

Because pipe tobacco is taxed at a lower rate than cigarettes, some companies have begun offering the option of purchasing pipe tobacco and allowing customers to roll their own cigarettes to avoid paying the federal cigarette tax

"The current loopholes in the taxes on tobacco products encourage the use of products like pipe tobacco, smokeless tobacco and 'nicotine candies' as a cheap source of tobacco, particularly among young people. This difference in tax rates doesn't make sense, and we are already seeing tobacco manufacturers abusing them by changing the labels on their products to avoid paying the higher tax. This bill will stop tobacco manufacturers from gaming the system and protect more children and teens from this dangerous habit," Durbin said.

"This legislation will stop big tobacco from exploiting loopholes that cheat the government out of tax dollars," said Lautenberg.

"I am proud to cosponsor the Tobacco Tax Equity Act to eliminate disparities in tobacco tax rates, closing a harmful loophole in our tax code that taxes repackaged pipe tobacco and other tobacco products at lower levels than cigarettes, small cigars and roll-your-own tobacco. This bill equalizes the federal tax rate for all tobacco products to that of cigarettes. It will generate more than a billion dollars in revenue."

They cited a Government Accountability Office (GAO) report published last month that said RYO tobacco products are currently being sold in packages labeled as pipe tobacco--which is taxed at a lower rate--with no change to the product. Also, they cited a recent report by the Centers for Disease Control & Prevention (CDC) that claimed more than $1.3 billion in state and federal revenue has been lost as a result of tobacco manufacturers relabeling RYO tobacco as pipe tobacco. By establishing tax parity and closing loopholes in the tobacco tax code, this bill would generate approximately $4 billion in revenue over five years.

The Tobacco Tax Equity Act would create tax parity by establishing the tax rate on all tobacco products at the same per-unit level as cigarettes. This legislation would eliminate the current tax incentive for tobacco companies to label RYO tobacco as pipe tobacco in order to sell their product at a lower cost, the senators said.