Tobacco Tax Revenue Has Gone Up in Smoke—And Not Entirely for the Reason You Think
Over the past several decades, smoking rates have drastically dropped in the United States—by about 73% according to the Centers for Disease Control. While this has contributed greatly to a decline in tobacco tax revenues, so have other consumer trends combined with differences in how tobacco products are taxed.
Today’s WatchBlog post looks at our new report on these trends and how tobacco taxes have not kept up.
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As smoking rates declined and new products emerged, tax revenues dipped
Over the last decade, federal revenues from tobacco excise taxes have dropped by more than 30%—from about $14 billion to $9 billion from fiscal years 2014 to 2024.
This loss in revenues is the result of 1) declines in sales for smoking products and 2) differing tax rates for these products. It also coincides with the emergence of new products that aren’t taxed at all.
How smoking rates have changed and why. Industry experts cite several reasons for the overall decline in smoking among Americans. One reason is that some states and localities, such as California and Massachusetts, have banned the sale of most tobacco with flavor additives, including menthol. Another reason is the increased investment in and success of national anti-smoking campaigns.
Revenue from Federal Excise Tobacco Taxes Declined between FY 2014 and 2024
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Differences in tax rates on tobacco products. Tax laws enacted more than a decade ago led to pipe tobacco and some large cigars being taxed at lower rates than cigarettes, roll-your-own tobacco, and small cigars. Specifically, small cigars and roll-your-own tobacco are taxed at the same rate as cigarettes. But pipe tobacco and large cigars are not, even though they may also be substitutes for cigarettes. For example, a hand-rolled cigarette made with pipe tobacco is taxed at a much lower rate than either a hand-rolled cigarette made with roll-your-own tobacco or a factory-made cigarette. And pipe tobacco is an easy substitute for roll-your-own tobacco because the products are virtually identical. Similarly, large cigars may be similar to small cigars because the only difference for tax purposes is weight.
As a result, the federal government is not collecting the revenue it could if tobacco products were all taxed the same way.
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How the popularity of alternative products has impacted tax revenues. The first electronic cigarettes, often called “e-cigarettes,” became available in the early 2000s. By 2021, e-cigarettes were the second most common tobacco product in the United States—with sales increasing 47% between 2019 and 2023.
Consumers are also increasingly using new oral tobacco or nicotine pouches. Marketed as “safer” products than traditional cigarettes or other smoking products, nicotine pouches last year surpassed the combined sales of the top two e-cigarette brands.
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But how much has this surge in popularity affected the market for traditional smoking tobacco products? The answer is still a bit fuzzy. Determining the effect these products have had on the market is complicated. Data on sales of these products is very limited. For example, many e-cigarettes are imported and/or bought online. As a result, the data about these purchases isn’t tracked as consistently as traditional cigarettes sold in stores.
In addition, consumers may be dual- or triple-users of traditional tobacco products and alternative products, according to industry experts. A smoker who buys e-cigarettes and oral nicotine pouches, but prefers cigarettes, won’t affect the cigarette market as much as someone who only smokes e-cigarettes.
Leveling the tax rates on similar tobacco products
If similar tobacco products were taxed the same rate (keeping in mind that some aren’t taxed at all), federal revenues would increase. We estimated that if the tax rate for pipe tobacco were increased to the same rate as roll-your-own tobacco, the federal government could collect at least $1.5 billion dollars in additional revenue for both products from fiscal years 2025-2029.
Federal revenue would also likely increase if the minimum tax rate for large cigars was the same as that for small cigars. However, it’s a bit trickier to determine a precise estimate because of limited information about the retail prices of large cigars and how consumers might respond to increased taxes.
We previously recommended that Congress consider leveling (or equalizing) the tax rate on similar tobacco products. For a more in-depth look at tobacco taxes, check out our new report.
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