May 10, 2012

Durbin, Lautenberg, Blumenthal Introduce Legislation to Close Tobacco Tax Loopholes

Legislation follows CDC Report that found $1.3 billion in lost revenue for state and federal governments as a result of roll-your-own tobacco relabeled as pipe tobacco

[WASHINGTON, D.C.] U.S. Senator Dick Durbin (D-IL) was joined today by Senators Frank Lautenberg (D-NJ) and Richard Blumenthal (D-CT) to introduce the Tobacco Tax Equity Act to close loopholes in the tax code that allow tobacco companies to avoid the federal cigarette and roll-your-own (RYO) tobacco tax. Because pipe tobacco is taxed at a lower rate than cigarettes, some companies have begun offering the option of purchasing pipe tobacco and allowing customers to roll their own cigarettes to avoid paying the federal cigarette tax


“The current loopholes in the taxes on tobacco products encourage the use of products like pipe tobacco, smokeless tobacco, and “nicotine candies” as a cheap source of tobacco, particularly among young people. This difference in tax rates doesn’t make sense, and we are already seeing tobacco manufacturers abusing them by changing the labels on their products to avoid paying the higher tax. This bill will stop tobacco manufacturers from gaming the system and protect more children and teens from this dangerous habit,” Durbin said.


“These loopholes are another egregious example of tobacco companies putting the bottom dollar over public health the wellbeing of our children,” said Lautenberg. “This legislation will stop big tobacco from exploiting loopholes that cheat the government out of tax dollars. If companies won’t do what is right, then we will by working to pass this bill and close the loopholes.”


“Incredibly, the tobacco industry continues to seek profits by addicting children and avoiding taxes. I am proud to cosponsor the Tobacco Tax Equity Act to eliminate disparities in tobacco tax rates, closing a harmful loophole in our tax code that taxes repackaged pipe tobacco and other tobacco products at lower levels than cigarettes, small cigars, and roll-your-own tobacco. This bill equalizes the federal tax rate for all tobacco products to that of cigarettes. It will generate more than a billion dollars in revenue, and help prevent young people from beginning a deadly addiction,” Blumenthal said.


Last month, a Government Accountability Office report found that RYO tobacco products are currently being sold in packages labeled as pipe tobacco – which is taxed at a lower rate – with no change to the product. In addition, a recent report by the Centers for Disease Control and Prevention (CDC) revealed more than $1.3 billion in lost state and federal revenue as a result of tobacco manufacturers relabeling RYO tobacco as pipe tobacco. By establishing tax parity and closing loopholes in the tobacco tax code, this bill would generate approximately $4 billion in revenue over 5 years.


The Tobacco Tax Equity Act would create tax parity by establishing the tax rate on all tobacco products at the same per unit level as cigarettes. Under current law, small cigars and RYO tobacco products are taxed at the same level as cigarettes; however, cigars, smokeless tobacco, and pipe tobacco are taxed at a dramatically lower rate. As a result, some businesses have begun offering customers the option of purchasing under-taxed pipe tobacco or RYO relabeled as pipe tobacco and renting time on cigarette making machines in order to avoid paying the federal cigarette tax. This legislation would eliminate the current tax incentive for tobacco companies to falsely label RYO tobacco as pipe tobacco in order to sell their product at a lower cost.


In a letter to Durbin, American Cancer Society Cancer Action Network President Christopher Hansen, American Lung Association President and CEO Charles Connor, American Heart Association CEO Nancy Brown, and Tobacco-Free Kids President Matthew Myers said, “Creating a more equitable tax system, free of loopholes, will help prevent young people from starting to use tobacco products and help current users to quit.” The Tobacco Tax Equity Act is also supported by American Public Health Association.


Every year, tobacco use kills 443,000 Americans, most of whom started using tobacco as teenagers. Although significant progress has been made to reduce tobacco use among adolescents and young adults, nearly one in four high school seniors and one in three young adults under 26 still smoke. A recent report by the Surgeon General labeled tobacco use a “pediatric epidemic” that will kill one out of every three young smokers.

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