Sales of Pipe Tobacco Surge After Federal Tax Hike on Roll-Your-Own Tobacco

A report by the General Accountability Office (GAO) finds sales of pipe tobacco surged after the federal government imposed a 2,000 percent increase in taxes on roll-your-own tobacco and small cigars.

Forbes reports that the federal excise tax on cigarettes rose 158 percent in 2009, in order to pay for an expansion of the State Children’s Health Insurance Program. The government anticipated that smokers—particularly teens—might switch from cigarettes to roll-your-own tobacco and small cigars, which was then taxed at a lower rate. Therefore it raised taxes on roll-your-own tobacco from $1.10 per pound to $24.78 per pound; the tax on small cigars rose from $1.83 per pound to $50.33 per pound.

The tax on pipe tobacco rose at the same rate as the cigarette tax, increasing from $1.10 per pound to $2.83 per pound. Since those changes took effect, roll-your-own tobacco sales have decreased 74 percent, while pipe tobacco sales have increased more than nine-fold, according to the GAO report. “The shift can be mostly attributed to consumers switching from using roll-your-own tobacco to pipe tobacco in roll-your-own cigarettes, rather than to a sudden increase in pipe smoking,” the report notes.

Roll-your-own tobacco product manufacturers have rebranded their products as pipe tobacco, but have made few, if any, changes to their product. The GAO report notes that by using pipe tobacco instead of roll-your-own tobacco, customers can save almost $9 per carton in federal excise taxes. When state taxes are taken into account, the savings can be even greater.

According to the GAO, the changes have resulted in between $615 million and $1.1 billion in lost federal tax revenue. The agency recommends that Congress should consider equalizing the tax rates on roll-your-own and pipe tobacco.

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    April 19, 2012 at 12:42 PM

    I love that basic rules of economics will still get headlines. An increase in the price of a good will always drive up the demand for a substitute good. what is surprising is that the effect is not much larger. i don’t understand why anyone would pay the extra tax on loose tobacco just because the alternative has a picture of a pipe on the wrapper.

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