Legislation would apply tax equity to all tobacco products, including new developments like e-cigarettes.
U.S. Senator Dick Durbin (D-IL) was joined by Senators Richard Blumenthal (D-CT), Jack Reed (D-RI), and Sherrod Brown (D-OH) this week in introducing the Tobacco Tax Equity Act to close loopholes in the tax code.
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 roll-your-own (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 label RYO tobacco as pipe tobacco in order to sell their product at a lower cost.
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 84%. 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.
This legislation would apply to any product determined to be a tobacco product by the U.S. Food and Drug Administration (FDA). This will ensure that as tobacco companies develop new products—like e-cigarettes—they are taxed at the same level as other tobacco products.
In April 2014, the FDA proposed a rule that would expand the agency’s regulatory authority to regulate e-cigarettes and other liquid nicotine delivery devices. Once this proposed rule is finalized, it will deem e-cigarettes a tobacco product, and subject to the tax parity established by this legislation.
