Bill Would Close Tax Code Loophole on Roll-Your-Own Tobacco

Three U.S. senators have introduced legislation that would close loopholes in the tax code that allow tobacco manufacturers to avoid the federal cigarette tax and the roll-your-own tobacco tax.

Since pipe tobacco is taxed at a lower rate than cigarettes, some companies are offering customers the option of buying pipe tobacco, and allowing them to roll their own cigarettes to avoid paying the federal cigarette tax, CSPnet.com reports.

Senators Dick Durbin of Illinois, Frank Lautenberg of New Jersey and Richard Blumenthal of Connecticut have introduced the Tobacco Tax Equity Act, which would establish the tax rate on all tobacco products at the same per-unit level as cigarettes. The bill is designed to eliminate the current tax incentive for tobacco manufacturers to label roll-your-own tobacco as pipe tobacco in order to sell their product at a lower cost, according to the senators.

A recent report by the General Accountability Office (GAO) found the sales of pipe tobacco surged after the federal government imposed a 2,000 percent increase in taxes on roll-your-own tobacco and small cigars.

The federal excise tax on cigarettes rose 158 percent in 2009, in order to pay for an expansion of the State Children’s Health Insurance Program. The government anticipated that smokers—particularly teens—might switch from cigarettes to roll-your-own tobacco and small cigars, which was then taxed at a lower rate. Therefore it raised taxes on roll-your-own tobacco from $1.10 per pound to $24.78 per pound; the tax on small cigars rose from $1.83 per pound to $50.33 per pound.

The tax on pipe tobacco rose at the same rate as the cigarette tax, increasing from $1.10 per pound to $2.83 per pound. Since those changes took effect, roll-your-own tobacco sales have decreased 74 percent, while pipe tobacco sales have increased more than nine-fold, according to the GAO report.