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).

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Table 1. Comparison of Tobacco Excise Tax Rates

Commodity

Statutory

Rate —

1990

Statutory

Rate —

1991

Statutory

Rate —

1993

Statutory

Rate —

2000-2001

Statutory

Rate —

2002

Cigarettes, small

(Class A) Rates

are per thousand

$8.00

(16 cents per

pack)

$10.00

(20 cents per

pack)

$12.00

(24 cents per

pack)

$17.00 (34

cents per

pack)

$19.50

(39 cents per

pack)

Cigarettes, large

(Class B) Rates

are per thousand

$16.80

$21.00

$25.20

$35.70

$40.95

8.5% of

wholesale

price (but not

more than

$20 per

thousand)

10.625% of

wholesale

price (but not

more than

$25 per

thousand)

12.75% of

wholesale

price (but not

more than

$30 per

thousand)

18.063% of

wholesale

price (but not

more than

$42.50 per

thousand)

20.719% of

wholesale

price (but not

more than

$48.75 per

thousand)

75 cents

93.75 cents

$1.125

$1.594

$1.828

0.500 cent

0.625 cent

0.750 cent

1.06 cents

1.22 cents

Cigarette tubes

(per 50)

1.0 cent

1.25 cents

1.5 cents

2.13 cents

2.44 cents

Snuff

(per pound)

24 cents

30 cents

36 cents

51 cents

58.5 cents

Chewing Tobacco

(per pound)

8 cents

10 cents

12 cents

17 cents

19.5 cents

Pipe Tobacco

(per pound)

45 cents

56.25 cents

67.5 cents

95.67

cents

$1.0969

95.67 cents

per pound

$1.0969 per

pound

Large cigars,

wholesale price

not more than

$235.294 per

thousand

Small cigars

(per thousand)

Cigarette Papers

(per 50)

“Roll Your Own

Tobacco”

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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.

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Table 2. Tobacco Excise Tax Estimates and

Actual Revenue Receipts

(Revenue Amounts in Billions)

Fiscal Year

Tobacco Excise Tax

Revenues

(Estimates Made

Under Prior Tax

Law) a

Joint Tax

Committee

Estimated Increase

in Tobacco Excise

Tax Receipts b

Tobacco Excise Tax

Revenues (Actual

for FY2000-2003

and Estimates

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.