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The US Alcohol and Tobacco Tax and Trade Bureau (TTB) collects federal taxes on tobacco products produced or imported for domestic consumption. Tobacco manufacturers pay taxes twice a month on products produced, and customs agents pay taxes on imported products.1 Monthly data from TTB can be used to track national trends in tobacco production.
Federal taxes increased in 1 April 2009 for all tobacco products, although the increases varied by product type. Tax rates increased the most (over 2000%) on roll your own tobacco and small cigars, to make the rates for these products equal to taxes on cigarettes and increased by a relatively small 158% on other products, including pipe tobacco and large cigars. The tax rate on roll your own tobacco is now nearly US$22 more per pound than pipe tobacco; the rates were equal before the tax change. Old and new rates are shown in table 1, along with the per cent change in production observed between October 2008 and October 2009.
Figures 1 and 2 are graphs comparing manufacturing data for domestically produced tobacco products taxed for sale in the USA, from January 2003 through October 2009. These data do not include imported products, which make up a relatively small portion of the total tobacco market. In April 2009, the first month of the new tax rate, reported production of roll your own tobacco dropped dramatically and reported production of pipe tobacco shot up. Pipe tobacco production peaked in August 2009 with over 1.7 million pounds manufactured, over six times as much as the previous August. Similarly, production of small cigars plummeted in April 2009 when the small cigar tax rate increased by US$48.50 per thousand units. Simultaneously, cheaper, large cigars (class A–G) saw a large increase in production while domestic production of the most expensive large cigars (class H) nearly ceased.
Small and large cigars are differentiated by weight. To avoid paying higher taxes, manufacturers appear to have added weight to small cigar products so that they will be taxed at the lower large cigar rate.2 The decrease in production of grade H large cigars may be related to manufacturing capacity if equipment previously used to make class H cigars is now dedicated to grade A–G cigars, which, in turn, are replacing the small cigars. By statute, pipe tobacco and roll your own are distinguished not by characteristics of the products but by how they are offered for sale. The data suggest that roll your own has been repackaged as pipe tobacco, avoiding millions of dollars in taxes.3
While the production changes could have occurred in response to consumer demand, this is unlikely because most pipe tobacco is too coarse and moist to be used in roll your own cigarettes.3 Furthermore, tobacco manufacturers have admitted to changing production in response to the tax increases.2 3 Thus, it appears that the April 2009 tax changes created large differences in tax rates on similar products, stimulating tobacco companies to quickly shift production and packaging to avoid paying taxes and keep prices low.
These data thus demonstrate the tobacco industry's ability to minimise tax liability by relabelling products. When tax rates on similar products are different, there is an incentive for tobacco companies to relabel products to minimise tax liability. Equalising tax rates for different products will eliminate this loophole and discourage product switching.
Acknowledgments
I thank the two anonymous reviewers who provided valuable feedback on this manuscript. I would also like to acknowledge the investigative work of Matt Apuzzo of the Associated Press, for finding the story behind the numbers.
Footnotes
Competing interests None.
Provenance and peer review Not commissioned; externally peer reviewed.