Proposed Tobacco Excise Tax Changes in H.R. 5376, the Reconciliation Bill

Proposed Tobacco Excise Tax Changes in H.R. 5376, the Reconciliation Bill

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October 6, 2021
Proposed Tobacco Excise Tax Changes in H.R. 5376, the
Reconciliation Bill
Federal tobacco excise taxes are a continuing interest for
Table 1. Federal Tobacco Excise Tax Rates: Current
many in Congress seeking to improve public health and to
Law and H.R. 5376
raise revenue. Today, the tobacco tax is one of the largest
federal excise taxes. In FY2020, it raised $12.4 billion for
Type of
the General Fund.
Product
Current Law
H.R. 5376
Smal
$50.33 per 1,000
$100.66 per 1,000
A range of tobacco tax increases are included in H.R. 5376,
cigarettes
($1.01 per pack of 20)
($2.01 per pack of 20)
commonly known as the reconciliation bill. In addition to
increasing most of the currently existing tobacco tax rates,
Large
$105.69 per 1,000
$211.39 per 1,000
H.R. 5376 would levy a tax on other products containing
cigarettes
($2.11 per pack of 20)
($4.22 per pack of 20)
nicotine, such as e-cigarettes. The Joint Committee on
Smal cigars
$50.33 per 1,000
$100.66 per 1,000
Taxation estimates that the proposed tobacco tax increases
($1.01 per pack of 20)
($2.01 per pack of 20)
would raise $96.8 billion from FY2022 to FY2031.
Large cigars
52.75% of sales price
$49.56 per pound, but
Economic research suggests that a tobacco tax increase is
but not to exceed
not less than $0.1006
an effective way to decrease consumption of tobacco
$0.4026 per cigar
per cigar
products. At the same time, a tobacco tax increase would
Pipe tobacco
$2.8311 per pound
$49.56 per pound
most likely be regressive, meaning that people with lower
incomes would pay a higher share of their income in tax
Chewing
$0.5033 per pound
$10.70 per pound
than people with higher incomes. This is largely because
tobacco
people with lower incomes are more likely to consume
tobacco products. Also, a federal tax increase would likely
Snuff
$1.51 per pound
$26.84 per pound
reduce the revenue that state and local governments receive
Roll-your-
$24.78 per pound
$49.56 per pound
from their own tobacco taxes, due to reduced demand.
own tobacco
Comparing Current Law with Proposed
Cigarette
$0.0315 per 50
$0.0315 per 50
Changes
papers
The current federal excise tax rates on tobacco products
Cigarette
$0.0630 per 50
$0.0630 per 50
took effect in April 2009. Tobacco excise taxes were
tubes
increased as a “pay-for” in the Children’s Health Insurance
Program Reauthorization Act of 2009 (P.L. 111-3). Current
Discrete
Not taxed unless snuff
$100 per 1,000
tobacco taxes cover a variety of tobacco products, with
single-use
or chewing tobacco
covered products defined in 26 U.S.C. §5702. This section
unitsa
includes definitions for cigarettes, cigars, smokeless
Other
Not taxed
$100.66c per 1,810
tobacco (including snuff and chewing tobacco), pipe
nicotine
mil igrams of nicotine
tobacco, and roll-your-own tobacco.
productsb
H.R. 5376 would increase the tax rates applicable to each of
Source: Table created by CRS. Current law from 26 U.S.C. §5701.
these tobacco products. Table 1 compares the current-law
H.R. 5376, “To Provide for Reconciliation Pursuant to Title II of
tax rates with the proposed changes in H.R. 5376. Taxes on
S.Con.Res. 14,” from the version reported in the U.S. House of
small and large cigarettes and small cigars would double.
Representatives on Sept. 27, 2021.
For example, taxes on small cigarettes would increase from
a. Snuff or rol -your-own tobacco products would be taxed as
$50.33 per 1,000 cigarettes ($1.01 per pack of 20) to
discrete single-use units instead if they meet that definition.
$100.66 per 1,000 cigarettes ($2.01 per pack of 20).
b. Tobacco products meeting the definition of one of the other
taxable classes (e.g., a large cigar) would be taxed at that rate,
Large cigars would be taxed differently under H.R. 5376.
without regard to the nicotine content.
Currently, a large cigar is subject to a 52.75% sales tax, not
to exceed $0.4026 per cigar. H.R. 5376 changes the rate to
c. This rate would be statutorily tied to the tax rate on smal
$49.56 per pound, and not less than $0.1006 per cigar. For
cigarettes.
example, a 5 gram cigar would have $0.5463 in taxes.
H.R. 5376 would tax discrete single-use units, defined as a
product that is not intended to be smoked and is in the form
of a lozenge, tablet, pill, pouch, dissolvable strip, or other
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Proposed Tobacco Excise Tax Changes in H.R. 5376, the Reconciliation Bill
form, at a rate of $100 per 1,000 units. Under current law,
largest difference in use by income. In households with an
these products are not taxed unless they meet the definition
income of less than $35,000, 21.4% of adults report
of another tobacco product.
smoking cigarettes, a rate about three times higher than
among adults in households with an income of $100,000 or
H.R. 5376 would also tax other products containing
more (7.1%). Use of other tobacco products is less
nicotine, such as e-cigarettes. The tax would be equal to the
impacted by annual household income.
rate on 1,000 small cigarettes ($100.66) per 1,810
milligrams of nicotine in the product. Any product
Figure 1. Percentage of U.S. Adults Who Reported
containing nicotine approved by the Food and Drug
Tobacco Product Use, 2019
Administration for use in a drug (such as cessation
By Annual Household Income
therapies) would be excluded. Products meeting the
definition of another tobacco product would be taxed at that
product’s rate, regardless of nicotine content.
Economic Research on the Effect of
Tobacco Taxes on Smoking
Economic studies have found strong evidence that increases
in tobacco excise taxes that cause an increase in price lead
to reduced tobacco consumption. This is true for adults and
younger consumers, and for people starting to smoke as
well as continuing smokers. Higher prices also reduce

consumption of noncigarette tobacco products.
Source: Monica E. Cornelius et al., “Tobacco Product Use Among
Adults—United States, 2019,” Centers for Disease Control and
Economists typically measure changes in the quantity
Prevention, Morbidity and Mortality Weekly Report 69(46): 1736-1742.
demanded due to price changes using elasticities. An
elasticity measures the percentage change in quantity
While tobacco taxes are regressive, some studies
demanded due to a given percentage change in price. If a
demonstrate that the health benefits of reduced smoking are
good has an elasticity of -0.5, then a 10% increase in price
progressive. These studies argue that if people do not fully
would be expected to reduce the quantity demanded by 5%.
consider their own future health when smoking, they may
Most studies of cigarette demand find an elasticity between
smoke too much relative to their long-term “optimal” level
-0.2 and -0.6. Elasticities for noncigarette tobacco products
of smoking. Tobacco taxes could then be a self-control tool
vary by product, but are generally similar. Estimated price
due to the higher price faced by consumers, with a
elasticities for e-cigarettes vary widely; some studies find
disproportionate share of the benefits of stopping or
elasticities near -0.4 while others find an elasticity of -1.3.
reducing tobacco consumption going to people with lower
incomes because they are more likely to smoke.
Empirical evidence of the elasticity of demand for tobacco
Interactions with State and Local
products can be used to evaluate how much the proposed
Government Tobacco Taxes
tax increase might affect demand for tobacco products.
Every state and the District of Columbia levies its own
Suppose a pack of cigarettes costs $5 before taxes. Under
excise tax on cigarettes and other tobacco products.
current federal law and using the median state tax, the pack
Nationally, the median state excise tax rate is $1.78 per
would have $2.79 in taxes ($1.01 federal and $1.78 state).
pack of cigarettes in 2021. The highest is $4.50 per pack in
The final retail price would be $7.79. H.R. 5376 would
the District of Columbia, while the lowest is $0.17 per pack
raise the federal tax rate on a pack of 20 small cigarettes to
in Missouri. Some localities in Alabama, Illinois, Missouri,
$2.01. The new retail price of the pack of cigarettes would
New York, Tennessee, and Virginia levy additional local
be $8.79, a 12.8% increase in price. Using the consensus
excise taxes. The 1998 Master Settlement Agreement also
estimate for cigarette elasticity of -0.2 to -0.6, a simple
effectively imposes an additional state excise tax across all
estimate is that the federal tax rate increase may be
states that is currently over $0.50 per pack.
expected to decrease the quantity of cigarettes consumed by
between 2.6% and 7.7%.
E-cigarette taxes are less common; 29 states and the District
of Columbia levy an excise tax on e-cigarettes. The form of
Equity Considerations
these taxes varies, with some taxes being a per-unit tax and
Tobacco taxes, like many other excise taxes, tend to be
others a percentage of the price or volume.
regressive. This means that people with lower incomes pay
a larger share of their income in taxes. The Centers for
The effect of a federal tobacco tax increase on state and
Disease Control and Prevention stated that, in the case of
local government revenues would depend upon state and
tobacco products, people with lower incomes pay a larger
local tax rates. Following a price increase due to higher
share of their income in taxes because people with lower
federal taxes, the quantity purchased would most likely
incomes are more likely to use tobacco products.
decrease, meaning revenue that state and local governments
receive from tobacco taxes would likely fall, unless those
Figure 1 shows the percentage of U.S. adults with different
governments take action to raise their own rates.
levels of household income in 2019 who reported using
tobacco products every day or some days. Cigarettes are the
Anthony A. Cilluffo, Analyst in Public Finance
most commonly used tobacco product and also showed the
IF11941
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Proposed Tobacco Excise Tax Changes in H.R. 5376, the Reconciliation Bill

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