Unintended Consequences

A dramatic increase in the federal tobacco tax will likely have the opposite effect of the bill’s intention.

Unintended Consequences

August 2021   minute read

By: Anna Ready Blom

When you dramatically raise the price of a good, consumers must grapple with paying the higher price or looking for it elsewhere at a lower price. When somewhere else is the illicit market, that creates a huge problem for society. And that’s the potential unintended result of current legislation in Congress that proposes sweeping federal excise tax (FET) increases on all tobacco and nicotine products.

In April, Sen. Dick Durbin (D-IL) and Rep. Raja Krishnamoorthi (D-IL-8) introduced the Tobacco Tax Equity Act of 2021 in the Senate and House of Representatives. The legislation proposes substantially increasing the FET on cigarettes and taxing all other tobacco and nicotine products at the same level.

Under current law, the federal tax rate for small cigars and roll-your-own cigarettes is at the same level as cigarettes. However, large cigars, smokeless tobacco and pipe tobacco currently have a lower rate. E-cigarettes are not currently taxed at the federal level but are taxed at the state level in 17 states. The legislation would peg the new tax rates to inflation.

Our Position

NACS historically hasn’t taken a position on modest increases of the FET for tobacco since the increases have the same effect on every tobacco retail store across the country. However, when the increase is as severe as the Tobacco Tax Equity Act of 2021 proposes, it will not dissuade current users from purchasing the product. Instead, it will just shift them to the illicit tobacco market where age isn’t verified, and products are unregulated. For this reason, NACS opposes a substantial increase of the FET for tobacco and nicotine products.

A shift to the illicit market unlevels the playing field for tobacco retailers like convenience stores that spend significant time and resources to comply with tobacco regulations. This includes training employees in robust age-verification protocols, how to store and safely stock products, investing in signage and, in many cases, advanced technology. In addition, these retailers collect and remit the appropriate taxes on these products.

In the illicit tobacco market, none of these safety procedures and protocols occur. Sellers operate completely outside of the law, offering unregulated products to users of all ages. This is the opposite of Congress’ intention when it passed the Tobacco Control Act in 2009, giving the Food and Drug Administration (FDA) the authority to regulated tobacco and nicotine products. Part of the FDA’s job is to oversee the manufacturing of these products, which includes in-depth scientific reviews and scrutiny before a product is approved for the market. Yet illicit market products and counterfeit goods are completely outside of FDA scrutiny.

Tobacco has an entrenched problem of illicit market sales that has never been adequately addressed. Earlier this year, the FDA announced that in coordination with U.S. Customs and Border Protection officers, it had seized more than 33,000 units of counterfeit e-cigarettes at a value of $719,453.

“Many counterfeit, unapproved or unauthorized products are likely produced in unregulated facilities with unverified ingredients posing a serious health concern to consumers. It is especially alarming when these types of counterfeit and unauthorized products find their way into the hands of children as studies indicate,” said U.S. Customs and Border Protection Port Director Timothy Lemaux in an FDA news release.

The proposed FET increase will only exacerbate the existing problem of the illicit tobacco market.

Legislation Status

The Tobacco Tax Equity Act of 2021 will need 60 votes to pass the Senate, and given the dynamics among lawmakers, it is unlikely to garner the support needed to pass as a stand-alone bill. However, with Congress trying to pass massive legislative packages, such as infrastructure, lawmakers need to find sources of revenue, colloquially referred to as “pay-fors,” to fund all they are proposing. The sponsors of the FET increase could try and attach it to a larger bill as a “pay-for.” NACS is organizing tobacco retailers to oppose this effort.

As it stands, the proposed FET increase for tobacco is not going to result in consumers quitting the products, as the bill’s sponsors intend. Instead consumers will turn to an illicit market—the ultimate unintended consequence.

Tax Hike

The proposed federal tobacco tax increases include:

  • Doubling the federal tax rate on cigarettes (raising the tax on a carton of large cigarettes from $105.69 to $211.38)
  • Applying tax parity across all tobacco products by increasing the federal tax rate for all other tobacco products to match the new tax rate for cigarettes including:
    • Smokeless tobacco, which includes “Discrete Single-Use Units” (any tobacco or nicotine product not intended to be smoked and is in the form of a lozenge, tablet, pill, pouch, dissolvable strip or other discrete single-use or single-dose unit)
    • Large and small cigars
    • E-cigarettes/vapes
    • Pipe tobacco
    • Roll-your-own tobacco
Anna Ready Blom

Anna Ready Blom

Anna Ready Blom is NACS director of government relations. She can be reached at [email protected].

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