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Tobacco Excise Taxes

RAI and its operating companies oppose additional increases in tobacco excise taxes because they burden adult tobacco consumers and are harmful to our business. These regressive taxes have negative, unintended consequences, such as escalating the amount of illicit tobacco trade and other illegal activity. In fiscal year 2015, more than $32.9 billion in tobacco excise taxes were paid to federal, state and local governments. In 2015 alone, RAI companies paid about $3.9 billion in federal cigarette excise taxes.

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 500 cities, towns and counties tax cigarettes. As a result, on average, tobacco excise taxes account for more than 50 percent of the total cost of a pack of cigarettes.

Additionally, $11.1 billion is paid in sales tax and MSA payments to the states each year.

Even so, policymakers support cigarette excise taxes as a way to raise revenue while providing an incentive for people to quit smoking. 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 continued to fall. In the last three years, shipments have decreased by 0.1 percent, 3.2 percent and 4.6 percent in 2015, 2014 and 2013 respectively.

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.

“Cigarette taxes are about ten times more burdensome for low-income taxpayers than for the wealthy.”
Institute on Taxation and Economic Policy, 2009 brief
Excise taxes are considered regressive because they disproportionately impact people with low to moderate incomes. A 2007 study by the Heritage Foundation found that more than one-fourth of adult smokers live below the federal poverty line. In 2009, a Gallup poll of more than 350,000 people found that 62 percent of smokers earn less than $36,000 a year, while 13 percent made more than $90,000 annually. According to an Institute on Taxation and Economic Policy 2011 brief, in 2009, “… [t]he poorest twenty percent of non-elderly Americans spent 0.9 percent of their income, on average, on these taxes, while the wealthiest 1 percent spent less than 0.1 percent of their income on cigarette taxes. In other words, cigarette taxes are about ten times more burdensome for low-income taxpayers than for the wealthy.”

Tobacco excise tax increases often have unintended consequences.

  • Taxes can drive illicit trade. As states continue to increase tobacco excise taxes, there continues to be an increase in the smuggling of cigarettes across state and county lines. According to the Tax Foundation, smuggled cigarettes account for more than 25 percent of consumption in 12 states, with smuggled cigarettes accounting for almost 60 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) State of the Industry Report, in 2014, tobacco products generated more than 32 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 out.

Goals and Leadership

RAI’s tobacco excise tax strategy is led by the Commercial Integrity Pillar Team, which advocates for policies and activities that support a fair marketplace and a level competitive playing field. The Commercial Integrity Pillar Team, which meets monthly, is composed of individuals from public affairs, consumer and trade marketing, sustainability, strategy and planning, tax and operations. The team reports to the Transforming Tobacco Steering Committee and to the RAI Leadership Team on progress of its programs and priorities.

Programs and Priorities

RAI and its operating companies engage with diverse stakeholders, including retailers, consumers and government agencies, to address tobacco excise tax issues. Our dedicated website, TransformTobacco.com, provides information on tobacco excise taxes and other tobacco-related issues, as well as providing information on how to contact elected officials. 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.

As vapor products are different from traditional cigarettes, and may present less risk than cigarettes, we believe they should be taxed differently. In 2015, we particularly focused our efforts on preventing onerous taxes and regulation of vapor. 

Traditional CigaretteVapor Product
TobaccoNo tobacco leaf
Burns tobaccoHeats a liquid solution producing a vapor
Burning tipNo lighting, no fire
Cigarette smoke, secondhand smokeNo smoke or secondhand smoke
Cigarette ashes, odors and buttsNo ashes, no cigarette odor, no cigarette butts

We share the belief of many researchers that smoke-free tobacco products, including vapor products, may pose less risk than conventional cigarettes and high taxes can be a barrier that prevents smokers from considering switching to vapor products.