Among the intended goals of higher taxes on cigarettes is that some smokers will quit rather than deal with the increased cost. While this may happen, newly released numbers show that taxing cigarettes also drove up the sales of forms of tobacco that are taxed at lower rates.
The Children’s Health Insurance Program Reauthorization Act (CHIPRA) of 2009 increased and equalized federal excise tax rates for cigarettes, roll-your-own tobacco, and small cigars. It also increased the tax rates on pipe tobacco and cigars, but not to the level of the other items.
And so some savvy smokers realized there was money to be saved by simply switching to the less-taxed tobacco.
From the Government Accountability Office report:
Monthly sales of pipe tobacco increased from approximately 240,000 pounds in January 2009 to over 3 million pounds in September 2011, while roll-your-own tobacco dropped from about 2 million pounds to 315,000 pounds. For the same months, large cigar sales increased from 411 million to over 1 billion cigars, while small cigars dropped from about 430 million to 60 million cigars.
The increased demand for pipe tobacco and large cigars was matched by manufacturers who cut down production on roll-your-own tobacco and small cigars in order to ramp up production on the items that had suddenly become popular.
In addition to the fact that people are still smoking, the GAO points out that the tax disparities “created opportunities for tax avoidance” as both consumers and manufacturers were choosing to focus on products that resulted in less tax revenue.
So what’s to be done?
“Congress… should consider equalizing tax rates on roll-your-own and pipe tobacco,” writes the GAO, saying lawmakers should also “consider options for reducing tax avoidance due to tax differentials between small and large cigars.”
In some locations, rolled cigarettes are taxed by state and local governments at even higher rates than roll-your-own tobacco, leading to stores that specialize in providing rolling machines to budget-minded smokers.