Excise Tax Increases
Tobacco products are already very heavily taxed. The federal excise tax on cigarettes is $1.01 per pack, and all states levy a varying rate of excise tax on cigarettes.
- In FY 2017, the federal cigarette excise tax generated
almost $13 billion in revenue for the federal government.
- In FY 2017, state and local governments generated about $17 billion in cigarette excise tax revenue.
- In FY 2017, federal, state, and local governments generated almost $30.5 billion in cigarette excise tax revenues.1
Altria's tobacco operating companies oppose tobacco product excise tax increases that:
Are unfair to adult tobacco consumers.
Revenues from tobacco product excise taxes are often used to fund general government programs that benefit many, while the economic burden of tobacco taxation is placed solely on adult tobacco consumers.
Tobacco excise taxes are based on the product and not on income level, making tobacco excise taxes highly regressive, adversely affecting low-income adult tobacco consumers more than high-income adult tobacco consumers. The Congressional Research Service identified the federal cigarette excise tax as "probably the most regressive of the federal taxes." 2
Create additional incentives for contraband and counterfeit tobacco product trafficking.
Increases in tobacco product excise taxes create significant financial incentives for criminals to engage in contraband tobacco products trafficking. As one federal Alcohol, Tobacco, Firearms and Explosives (ATF) agent said, "There is no doubt that there’s a direct relationship between the increase in a state’s tax and an increase in illegal trafficking."
Cigarette excise tax increases may also accelerate the growth of illegally imported cigarettes and imports of counterfeit cigarettes. The ATF and Immigration and Customs Enforcement have described contraband and counterfeit cigarette imports into the United States as a significant problem.3 In 2014, the ATF said “$7 billion to $10 billion in state and federal tax revenue is lost each year because of [cigarette] smuggling, up from $5 billion a few years ago.”4
Harm states by increasing incentives for adult tobacco consumers to buy tobacco products through lower tax or untaxed venues.
Tobacco tax increases can lead to unintended consequences, including decreases in state revenues. Because tobacco excise tax rates differ significantly between the states, adult tobacco consumers may travel to adjoining states with lower tax rates to purchase tobacco products. They may also purchase cigarettes over the Internet or on Native American territories, depriving the home state of expected revenue and harming local retailers.
For example, Philadelphia experienced a more than 50 percent decline in tax-paid cigarette sales following a $2.00 city excise tax increase in 2014.
Are costly to legitimate businesses, including retailers and wholesalers.
Tobacco product sales are an important revenue source for many retailers and wholesalers. According to the National Association of Convenience Stores, sales of cigarettes and other tobacco products account for nearly 36 percent of all in-store sales at convenience stores nationwide5.
When adult tobacco consumers react to tax increases by shifting their purchases across state lines or to other sources, such as on Native American territories or over the Internet—where taxes are often not collected—legitimate retailers and wholesalers lose sales and revenues. Retailers lose revenues not only from tobacco sales, but gasoline, groceries and other products often purchased at the same time as tobacco products.
Do little to solve systemic state budget problems and can lead to less stability in the states’ finances.
According to the National Conference of State Legislatures, “cigarette taxes are not a stable source of revenue6”. Cigarette excise tax increases frequently yield lower-than-expected revenues.
Between Fiscal Year 2009 and Fiscal Year 2016, 47 state excise tax increases went into effect7. Of these increases, only in four cases did the actual increase to state tax revenues meet or exceed estimates made by internal state offices in the first year following the increase. In the 23 instances for which data was available, states fell short of projections – one jurisdiction, Washington, D.C., fell short by 182 percent.
States that rely on a cigarette excise tax to fund government programs will create long-term revenue shortfalls that will have to be paid for with other revenues or through additional tax increases.
Excise Tax Methods
Many states tax smokeless tobacco products using the “ad valorem” method of taxation based on a percentage of the wholesale price. U.S. Smokeless Tobacco Company supports legislation to convert the method of taxation on moist smokeless tobacco (MST) to a method that is more appropriate to these products. In particular, MST products should be taxed by weight.
The company supports weight-based taxation of MST because it will:
- Establish tax equity for MST products of equal tobacco weight;
- Tax MST in the same manner as the federal MST tax and consistent with how state excise taxes are collected on other products;
- Create a more stable and predictable MST tax revenue for states;
- Reduce the complex administrative burden on states, wholesalers, and retailers; and
- Remove the tax subsidy for lower-priced products.
"Little cigars" that share many similarities with cigarettes in their appearance, packaging and marketing should be taxed at the same rate as cigarettes.
Altria's tobacco operating companies support two websites: