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Tobacco Excise Taxes

Management Approach

RAI and its operating companies oppose additional increases in tobacco excise taxes because they unfairly burden adult tobacco consumers. These regressive taxes also have negative, unintended consequences, such as escalating the amount of illicit tobacco trade and, potentially, other illegal activity. In fiscal year 2017, more than $33.4 billion in tobacco excise taxes were paid to the U.S. federal, state and local governments.

Cigarettes are already one of the most heavily taxed consumer products in the U.S. The federal excise tax is more than $1.00 per pack, and every state and the District of Columbia levy their own taxes on cigarettes, ranging from $0.17 to $4.35 per pack. Also, more than 600 cities, towns and counties tax cigarettes in addition to federal and state taxes levied. As a result, on average, tobacco excise taxes account for more than 50 percent of the total cost of a pack of cigarettes.

Additionally, roughly $12 billion in sales tax and MSA payments was paid to the states in fiscal year 2017.

State and local governments increasingly rely on such taxes to fund vital government services, often earmarking taxes to fund education, health services, or other programs that grow in cost over time due to inflation, population growth and other factors. Over the past decade, the number of cigarettes sold has decreased by an average of 3.6 percent per year. 

Increasing tobacco taxes to fund government programs is bad public policy. Funding public programs with a declining revenue source, such as tobacco products, invariably falls short of budgetary needs, causing legislators to look for more taxes or sources of revenue to fill the gap. Only about one-third of states that pass tobacco tax increases meet their revenue projections, according to The R Street Institute, a non- profit, non-partisan, public-policy research organization. Even so, some policymakers support cigarette excise taxes as a way to raise revenue while providing an incentive for people to quit smoking.

“Cigarette taxes fall disproportionately on low-income taxpayers.”
Institute on Taxation and Economic Policy, 2016 brief

Excise taxes are considered regressive because they disproportionately impact people with lower to moderate incomes. The Centers for Disease Control and Prevention reports that about 26 of every 100 adult smokers live below the poverty level. According to an Institute on Taxation and Economic Policy 2016 brief, in 2015, “… [t]he poorest twenty percent of Americans spent 0.8 percent of their income, on average, on cigarette taxes while the wealthiest 1 percent spent less than 0.1 percent of their income on these taxes. Simply put, cigarette taxes fall disproportionately on low-income taxpayers.”

Tobacco excise tax increases often have unintended consequences.

  • Taxes can drive illicit trade. Increases in tobacco excise taxes drive higher rates of cigarette smuggling across state and county lines. According to the Tax Foundation, smuggled cigarettes account for more than 25 percent of consumption in 8 states, with smuggled cigarettes accounting for more than 55 percent of consumption in New York. Illicit trade also undermines youth tobacco prevention efforts.
  • Higher taxes are bad for retail businesses. Cigarette tax increases also hurt legitimate retailers and jobs. According to the National Association of Convenience Stores (NACS), in 2017, tobacco products generated more than 34.1 percent of in-store sales. In pure sales dollars, cigarettes are the leading category for convenience stores. With tobacco excise taxes leading to increased illicit trade, honest businesses are losing sales.
  • Taxes may lead to budget shortfalls. Earmarking funds from a declining tax revenue stream, such as tobacco products, may cause budget shortfalls and force cuts in important government services.

Goals and Leadership

Individuals from public affairs, consumer and trade marketing, sustainability, strategy and planning, tax and operations are responsible for executing RAI subsidiaries’ tobacco excise tax strategy. These representatives advocate for policies and activities that support a fair marketplace and a level competitive playing field.

Programs and Priorities

RAI and its subsidiaries engage with diverse stakeholders, including retailers, consumers and government agencies, to address tobacco excise tax issues. Own It Voice It is the website designed to provide information on tobacco product excise taxes and other tobacco-related issues to adult tobacco consumers and retailers, as well as information on how to contact elected officials when important issues are under consideration in their state. RAI Services Company’s public affairs department also works to educate federal, state and local legislators on the negative impact that excessive tobacco excise taxes have on consumers, businesses and society.

RAI and its subsidiaries believe tax rates on tobacco products should be based on their relative risks to encourage switching to smoke-free alternatives. High taxes can be a barrier that prevents smokers from considering switching to vapor products. A growing body of scientific evidence shows that non-combustible tobacco and vapor products may present less risk than cigarettes. RAI and its subsidiaries believe the use of these products presents a complementary approach to prevention and cessation which may lead to greater reduction in smoking and an improvement to overall public health. Read more about RAI and its subsidiaries’ approach to tobacco harm reduction.

 A sound approach to the taxation of vapor products would avoid discriminating between disposable and rechargeable vapor products; it would avoid extending punitive tax rates from traditional cigarettes to vapor products, and would not hinder consumer opportunities for the use of vapor products as a method of smoking cessation.
Tax Foundation, 2016 brief