Senators Introduce Legislation to Close Tobacco Tax 'Loopholes'

Say taxing all tobacco products at same rate as cigarettes will generate $3.6 billion over 10 years

Dick Durbin

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 what they call loopholes in the tax code that allow tobacco companies to "avoid" the federal cigarette and roll-your-own (RYO) tobacco tax.

The Joint Committee on Taxation estimates that establishing tobacco tax parity and closing loopholes in the tobacco tax code would generate roughly $3.6 billion over 10 years, the senators said.

According to the senators, because pipe tobacco is taxed at a lower rate than cigarettes, some companies have begun relabeling RYO tobacco as pipe tobacco to avoid paying the federal cigarette tax.

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.

Under current law, small cigars and RYO tobacco products are taxed at the same level as cigarettes; however, cigars, smokeless tobacco and pipe tobacco are taxed at a dramatically lower rate. As a result, some businesses have begun offering customers the option of purchasing "under-taxed" pipe tobacco or RYO relabeled as pipe tobacco and renting time on cigarette making machines in order to avoid paying the federal cigarette tax, the senators claimed. This legislation would eliminate the current tax incentive for tobacco companies to "falsely" label RYO tobacco as pipe tobacco in order to sell their product at a lower cost, they said.

The bill would also close loopholes that the senators alleged have been "exploited" by the tobacco industry to avoid regulation and paying taxes for their products.

A recent report by the General Accountability Office (GAO) found that pipe tobacco sales increased more than 1,200% in September 2011 compared to January 2009, while RYO sales dropped 600%. A recent CDC study estimates that between August 2009 and August 2011, the sales of RYO as pipe tobacco resulted in more than $1.3 billion in lost state and federal revenue.

"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," Durbin said.

"This legislation will stop big tobacco from exploiting loopholes that cheat the government out of tax dollars. If companies won't do what is right, then we will by working to pass this bill and close the loopholes," said Lautenberg.