Federal Excise Taxes on Tobacco Products: Rates and Revenues

Federal Excise Taxes on Tobacco Products: Rates and Revenues

Order Code RS20343
Updated April 28, 2005
CRS Report for Congress
Received through the CRS Web
Federal Excise Taxes on Tobacco Products:
Rates and Revenues
Louis Alan Talley
Specialist in Taxation
Government and Finance Division
Summary
This report examines increases in excise tax rates on tobacco products contained
in the Balanced Budget Act of 1997 (P.L. 105-33). Under that act, the increased rates
on tobacco products became effective in two stages. The first scheduled increase in
rates occurred on January 1, 2000, while the second increase in rates occurred two years
later on January 1, 2002.
The increased rates apply to all tobacco products. In addition, the act included a
new excise tax on roll-your-own tobacco which became effective January 1, 2000. Also
included in the act were expanded compliance measures designed to ensure collections
of tobacco excise tax monies. As a result of payments made by tobacco companies
under the Master Settlement Agreement and the resulting increase in the cost of tobacco
products, tobacco consumption declined. Thus, projected federal tobacco revenues have
declined somewhat when compared to prior revenue estimates made at the time of the
Balanced Budget Act’s passage. This report will be updated as legislative developments
warrant.
Tax Rates
The federal tax rate on cigarettes remained unchanged at 8 cents per pack from 1951
to 1982.1 Since 1982 the rate has been increased by three federal tax acts. The rate was
increased to 16 cents per pack as part of the Tax Equity and Fiscal Responsibility Act of
1982 (P.L. 97-248). In the General Explanation of the Revenue Provisions of the Tax
Equity and Fiscal Responsibility Act of 1982, the Joint Committee on Taxation indicated
that the reason for this increase was that inflation had caused the effective level of the tax
to decline by more than 70% in constant dollars because the tax was imposed as a set
1 For a more detailed legislative history, see CRS Report 94-474, Federal Excise Taxes on
Tobacco Products: A Summary of Present Law and a Legislative History, by Thomas B. Ripy and
Mildred C. Washington.
Congressional Research Service ˜ The Library of Congress

CRS-2
amount, rather than as a percentage of sales price. The doubling of the tax rate did not
increase the per-pack tax, in real terms, above the 1951 level. Also, Congress felt that the
broad-based increase in revenue required by the fiscal outlook through 1985 mandated an
increase in the cigarette excise taxes.
Next, the rates were increased in two stages under the Revenue Reconciliation Act
of 1990 (P.L. 101-508). One half of the increase (4 cents per pack) took effect on January
1, 1991 with the second half (an additional 4 cents) in effect as of January 1, 1993. Thus,
the Revenue Reconciliation Act of 1990 raised the rates from 16 cents per pack to 24
cents per pack. The rates were increased because of large continuing federal budget
deficits and the need for additional federal revenues.
The most recent increase in federal excise tax rates on tobacco products occurred in
the Balanced Budget Act of 1997 (P.L. 105-33). Like the increases provided under the
Revenue Reconciliation Act of 1990, the tax rates on all tobacco products increased in
two stages. The rates first increased on January 1, 2000. The final increase in rates
occurred on January 1, 2002. In the case of cigarettes, the first stage increased rates by
10 cents a pack to 34 cents. In the second stage, the rates increased an additional 5 cents
a pack to make the federal excise tax 39 cents per pack. In addition, the act established
a tax rate for roll-your-own tobacco which is now in effect. Table 1 provides details on
the rate increases imposed on all tobacco products for the period 1990 to 2002.2
Revenues
The actual revenue yield from federal tobacco excise taxes remained relatively stable
during the 1990s. After the statutory rate increase in 1993 the revenue yield jumped from
just over $5 billion in FY1992 to $5.875 billion in FY1993. Fiscal year revenues over the
1993 to 1996 time period have ranged from a low of $5.691 billion to a high of $5.878
billion. The Joint Committee on Taxation estimated that the Balanced Budget Act of
1997’s increase in tobacco tax rates would increase revenues beginning in FY2000 (the
increased rate is effective for a nine-month period during that fiscal year). At the time of
the Balanced Budget Act of 1997’s enactment, the Joint Committee estimated that
additional revenues of $1.175 billion would be collected in FY2000 due to the first part
of the rate increase. Further, the committee estimated that the increased rates would result
in more than $2 billion in additional annual revenue by FY2002. As indicated earlier,
these projections were made prior to the tobacco Master Settlement Agreement. A
detailed breakdown of actual and estimated tobacco tax receipts is provided in Table 2,
which appears on the final page of this report.
2 As originally enacted, increased revenue collections were to be credited against the total
payments to be made under the tobacco industry settlement agreement. However, this provision
was repealed under section 519 of the FY1998 Appropriations for Labor, Health and Human
Resources (P.L. 105-78).

CRS-3
Table 1. Comparison of Tobacco Excise Tax Rates
Statutory
Statutory
Statutory
Statutory
Statutory
Commodity
Rate —
Rate —
Rate —
Rate —
Rate —
1990
1991
1993
2000-2001
2002
Cigarettes, small
$8.00
$10.00
$12.00
$17.00 (34
$19.50
(Class A) Rates
(16 cents per
(20 cents per
(24 cents per
cents per
(39 cents per
are per thousand
pack)
pack)
pack)
pack)
pack)
Cigarettes, large
(Class B) Rates
$16.80 $21.00 $25.20 $35.70 $40.95
are per thousand
Large cigars,
8.5% of
10.625% of
12.75% of
18.063% of
20.719% of
wholesale price
wholesale
wholesale
wholesale
wholesale
wholesale
not more than
price (but not
price (but not
price (but not
price (but not
price (but not
$235.294 per
more than
more than
more than
more than
more than
thousand
$20 per
$25 per
$30 per
$42.50 per
$48.75 per
thousand)
thousand)
thousand)
thousand)
thousand)
Small cigars
75 cents
93.75 cents
$1.125
$1.594
$1.828
(per thousand)
Cigarette Papers
(per 50)
0.500 cent
0.625 cent
0.750 cent
1.06 cents
1.22 cents
Cigarette tubes
1.0 cent
1.25 cents
1.5 cents
2.13 cents
2.44 cents
(per 50)
Snuff
24 cents
30 cents
36 cents
51 cents
58.5 cents
(per pound)
Chewing Tobacco
8 cents
10 cents
12 cents
17 cents
19.5 cents
(per pound)
Pipe Tobacco
95.67
45 cents
56.25 cents
67.5 cents
$1.0969
(per pound)
cents
“Roll Your Own
95.67 cents
$1.0969 per
Tobacco”
per pound
pound

CRS-4
When the Joint Committee on Taxation estimated the projected increase in tobacco
tax revenues, the Master Settlement Agreement between the states, the District of
Columbia, U.S. territories, and the tobacco industry had not been signed. As a result of
the Master Settlement Agreement, tobacco companies have raised prices a number of
times so as to raise revenues with which to make the annual payments totaling $204.5
billion through 2025. In apparent response to the increase in price, projected tobacco
consumption has declined. Thus, the Joint Committee’s revenue estimates for tobacco
receipts would be lower if made under current conditions. More recent projected federal
tobacco tax estimates, prepared by the Treasury Department, are shown in the final
column of Table 2, which appears on the final page of this report. The projected revenues
in the budget documents have also been revised downward.
Tobacco excise taxes are paid into the General Fund of the U.S. Treasury. There
continues to be no direct relationship between federal tobacco excise tax collections and
any particular federal program. In those cases where other excise taxes are directly linked
with spending programs (as through trust funds), there is usually a relationship between
the taxed products and a program financed by the funding (such as the gasoline and diesel
fuel excise taxes and the Highway Trust Fund). In some cases, excise taxes may be
imposed in situations where those actually responsible for damages cannot be held
directly accountable (such as the .01 cent excise tax on gasoline used for cleaning up
underground leaking storage tanks). In those cases, taxes are levied on current
production of a product associated with causing the damages that the government program
is trying to rectify.

CRS-5
Table 2. Tobacco Excise Tax Estimates and
Actual Revenue Receipts
(Revenue Amounts in Billions)
Tobacco Excise Tax
Joint Tax
Tobacco Excise Tax
Revenues
Committee
Revenues (Actual
Fiscal Year
(Estimates Made
Estimated Increase
for FY2000-2003
Under Prior Tax
in Tobacco Excise
and Estimates
Law) a
Tax Receipts b
FY2004-FY2010 c, d
1992 (actual)
$5.049
1993 (actual)
$5.875
1994 (actual)
$5.691
1995 (actual)
$5.878
1996 (actual)
$5.795
1997 (estimate)
$5.694
1998 (estimate)
$5.661
1999 (estimate)
$5.626
2000 (est./actual)
$5.594
$1.175
$7.221
2001 (est./actual)
$5.563
$1.720
$7.396
2002 (est./actual)
$5.535
$2.272
$8.274
2003 (est./actual)
$2.280
$7.934
2004 (estimate)
$2.290
$7.926
2005 (estimate)
$2.300
$7.899
2006 (estimate)
$2.310
$7.732
2007 (estimate)
$2.320
$7.590
2008 (estimate)
$7.459
2009 (estimate)
$7.325
2010 (estimate)
$7.202
a. U.S. Office of Management and Budget. Budget of the United States Government, Historical Tables,
Fiscal Year 1998. February 1997. p. 39.
b. U.S. Congress. Joint Committee on Taxation. General Explanation of Tax Legislation Enacted in 1997.
Washington, U.S. Govt. Print. Off., 1997. p. 546.
c. U.S. Office of Management and Budget. Budget of the United States Government, Analytical
Perspectives, Fiscal Year 2002. February 2001. p. 47.
d. U.S. Office of Management and Budget. Budget of the United States Government, Analytical
Perspectives, Fiscal Year 2006. February 2005. p. 299.