Intro to the Issue
The State Children's Health Insurance Program (SCHIP) funds health insurance programs for children of poor families. The 111th Congress passed legislation to expand this program, which includes an increase in federal cigarette and tobacco taxes as a funding source.
The increase in the excise tax on cigarettes is likely to increase tax evasion. Cigarettes are one of the highest taxed products in the U.S. economy. Federal, state and sometimes local taxes on cigarettes constitute a highly significant portion of the price charged to consumers when they purchase this product. These ever increasing prices have induced many consumers to seek illegal "untaxed" sources for tobacco products.
In addition, the increase in the federal excise tax on cigarettes is likely to increase crime at retail outlets. Over the last two decades, the price of a pack of cigarettes has increased dramatically. Consequently, retailers of cigarettes have experienced increased instances of robbery in which the criminals' primary objective has been to steal not cash, but cigarettes. Most tobacco retailers exercise strict control over how much cash is available in the event of a robbery. As a result, stealing cigarettes gives the criminals a higher return on their efforts than cash. An increase in the taxes on cigarettes only increases the amount which criminals can realize on the cigarettes they steal and thereby enhances the attractiveness of tobacco retailers as victims of robbery.
NACS opposed an increase in the federal excise tax on cigarettes and worked with the major tobacco manufacturers and wholesalers trying to defeat the increase in the tax.
On February 4, 2009, President Obama signed into law a significant increase in the federal excise tax on tobacco to pay for SCHIP expansion. The bill included a 62-cent-per-pack increase in the federal excise tax on cigarettes, bringing the tax to $1.01 per pack. The SCHIP program funds health insurance programs for children of poor families.
The new law not only includes multiple tobacco tax increases, but also a floor stocks tax for tobacco inventory held close of business March 31. The floor stocks tax will be imposed pursuant to regulation issued by the Department of Treasury. The bill provides that the floor stocks tax must be paid on or before August 1, 2009.
Floor stocks tax credit: there is a tax credit of $500 that is available to each "person" liable for the floor stocks tax included in the legislation. The language in the bill proves that the term “person” means the actual seller of the tobacco product involved. Thus, the proprietor of a retail establishment, not each store will be eligible to claim the tax credit.
The one exemption in the floor stock tax is on large cigars that weigh more than 3 pounds per 1,000 cigars.
The tobacco increases are as follows:
- Cigarettes: 62 cents per pack
- Large Cigars: up to $.40 per large cigar
- Little Cigars: 96 cents per pack
- Pipe Tobacco: $1.71 per pound
- Roll-Your-Own Tobacco: $23.53 per pound
- Chewing Tobacco: 30.5 cents per pound
- Snuff: 91.5 cents per pound
On March 16, the Alcohol and Tobacco Tax and Trade Bureau made available the instructions (PDF) and forms (PDF) that retailers need to comply with the March 31 floor stocks tax deadline. TTB also provided clarity on the difference between pipe tobacco and roll-your-own tobacco.