U.S. Senator Dick Durbin (D-IL) was joined today by Senators Frank Lautenberg (D-NJ) and Richard Blumenthal (D-CT) to introduce 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 relabeling RYO tobacco as pipe tobacco to avoid paying the federal cigarette 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 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.
“These loopholes are another egregious example of tobacco companies putting the bottom dollar over public health the wellbeing of our children,” said Lautenberg. “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.”
“Incredibly, the tobacco industry continues to seek profits by addicting children and avoiding taxes. 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 three billion dollars in revenue, and help prevent young people from beginning a deadly addiction,” Blumenthal said.
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. 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.
Furthermore, today’s bill would close loopholes that have been exploited by the tobacco industry to avoid regulation and paying taxes for their products. A recent report by the General Accountability Office found that pipe tobacco sales increased over 1200% 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 over $1.3 billion in lost state and Federal revenue.
In a letter to Durbin, American Cancer Society Cancer Action Network President Christopher Hansen, American Lung Association Senior Vice President Paul Billings, American Heart Association CEO Nancy Brown, and Tobacco-Free Kids President Matthew Myers said, “Creating a more equitable tax system, free of loopholes, will help prevent young people from starting to use tobacco products and help current users to quit.” The Tobacco Tax Equity Act is also supported by American Public Health Association and American Thoracic Association.
The toll of tobacco in the U.S. remains high, and the recent Surgeon General’s report on smoking found that tobacco use is a “pediatric epidemic” that afflicts millions of children. Tobacco remains the leading cause of preventable and premature death, annually accounting for 443,000 deaths– or 1 out of every 5 deaths– in America. Everyday 3,800 youth under the age of 18 try their first cigarette and 1 out of 3 young smokers will die from tobacco-related causes. Smoking costs the U.S. $96 billion in direct medical bills and $97 billion in lost productivity.