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Continued implications of taxing roll-your-own tobacco as pipe tobacco in the USA
  1. Michael A Tynan1,
  2. Daniel Morris2,
  3. Tara Weston3
  1. 1Oregon Health Authority, Public Health Division, Office of the State Public Health Director, Portland, Oregon, USA
  2. 2Portland, Oregon, USA
  3. 3Oregon Health Authority, Public Health Division, Health Promotion and Chronic Disease Prevention Section, Oregon Health Authority, Portland, Oregon, USA
  1. Correspondence to Michael A Tynan, Oregon Health Authority, Public Health Division, Office of the State Public Health Director, 800 NE Oregon Street, Suite 930, Portland, OR 97206, USA; michael.a.tynan{at}state.or.us

Abstract

Background In 2009, a US$21.95 per pound disparity was created in the Federal excise tax between roll-your-own cigarette tobacco (RYO) and pipe tobacco in the USA. After this disparity was created, pipe tobacco sales increased and RYO sales declined as some manufacturers repackaged roll-your-own tobacco as pipe tobacco and retailers began to offer cigarette rolling machines for consumers to use. A Federal law was passed in 2012 limiting the availability of these machines, however, it was unclear what impact this law had on the sales of roll-your-own tobacco labelled as pipe tobacco.

Methods The quantity of RYO sold as pipe tobacco each month was estimated using objective data on Federal excise taxes.

Results From April 2009 through June 2013, 107 million pounds of RYO were sold as pipe tobacco, reducing Federal excise tax collections by US$2.36 billion. The amount of RYO taxed as pipe tobacco climbed steadily and then levelled off following the July 2012 Federal law.

Conclusions The Federal law did not correct the market shift that occurred in pipe and RYO sales beginning in 2009. Even without access to commercial rolling machines, smokers are continuing to take advantage of the tax disparity. Without a solution, states will continue to lose revenue, and smokers who would otherwise quit will continue to have a low-cost alternative product available for purchase. Potential solutions include: (1) US Treasury Department distinguishing between RYO and pipe tobacco based on physical characteristics and (2) changing the Federal excise tax so that RYO and pipe tobacco are taxed at the same rate.

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Introduction

Increasing the price of tobacco products is among the most effective methods to reduce tobacco use, prompt cessation and prevent youth initiation.1 ,2 Increasing taxes is the most direct way for governments to increase cigarette prices.2 Federal taxes on all tobacco products increased in the USA on 1 April 2009, but not by the same amount.3 A US$21.95 per pound tax disparity was created between roll-your-own cigarette tobacco (RYO) and pipe tobacco, when previously the taxes on these products had been the same.4 After the tax change, pipe tobacco sales increased and RYO sales declined in a manner that was described by the US Government Accountability Office as a ‘significant market shift to avoid higher taxes’.4 A previous analysis found that from April 2009 through August 2011, smokers avoided paying over $1 billion in state and Federal tobacco taxes by making cigarettes with RYO labelled as pipe tobacco.5

According to Federal law, RYO is defined as ‘any tobacco which, because of its appearance, type, packaging, or labelling, is suitable for use and likely to be offered to, or purchased by, consumers as tobacco for making cigarettes or cigars, or for use as wrappers thereof.’6 ,7 Even though pipe tobacco and RYO have different physical characteristics (ie, pipe tobacco is coarser and moister than RYO), in practice, the products are taxed and regulated according to how manufacturers label them. After the Federal tobacco tax changed in 2009, manufacturers repackaged RYO as pipe tobacco,8 ,9 causing the market shift in sales to occur. Some manufacturers have acknowledged that they knew the tobacco would be used for making cigarettes, even though it was labelled as pipe tobacco.4

According to findings from the International Tobacco Control (ITC) Four Country Survey, RYO cigarettes users are more likely to be male, younger, have a lower income, and typically cite cost as a reason for use.10 ,11

While rolling cigarettes by hand is time-consuming, cigarette rolling machines can stuff loose tobacco into preformed cigarette tubes more quickly. Hand-cranked and motorised rolling machines are available for home use. Additionally, larger self-service, commercial rolling machines exist that can produce 200 cigarettes in 8 min.4 ,12 Retailers across the country began offering these RYO machines, allowing customers to make cigarettes that were less expensive than factory-made cigarettes, or cigarettes made with tobacco labelled as RYO.4 ,13–16 This resulted in RYO cigarettes made with pipe tobacco being sold for one-third the price of commercial cigarettes.4 The introduction of these commercial rolling machines coincided with the tax disparity,4 offering smokers who may have otherwise quit an opportunity to switch to a less expensive alternative product.5

To stop the loss of tobacco tax revenues, the US Department of Treasury issued a notice in 2010 deeming stores with RYO machines as cigarette manufacturers.12 Retailers sued and won an injunction preventing enforcement.17 However, before the case was resolved, a provision which settled the issue was included in the Federal law which reauthorised highway programmes through 2014 (Highway Bill).18 The provision required retailers who maintain commercial cigarette-making machines to register as cigarette manufacturers as of July 2012.18 The Highway Bill is otherwise unrelated to tobacco prevention, but was used by lawmakers as a legislative vehicle to enact this provision. Due to increased fees and regulations, this law was expected to eliminate RYO machines in retail stores.19 This study was conducted to assess whether the law had an impact on the sale of RYO labelled as pipe tobacco.

Methods

Data on quantities of tobacco taxed in the USA are from monthly reports published by the Department of Treasury's Alcohol and Tobacco Tax and Trade Bureau (TTB).20 Methods from the authors’ previous study were replicated to estimate the quantity of RYO sold as pipe tobacco each month.5

In the 12 months prior to the April 2009 tax increase, an average of 432 000 pounds of pipe tobacco were taxed per month; this number is the baseline for comparison. The monthly quantity of RYO sold as pipe tobacco is estimated as the amount of pipe tobacco taxed over the baseline. To determine the effect of the Highway Bill, trends in the months before and after July 2012 were compared.

Results

From April 2009 through June 2013, 107 million pounds of RYO were sold as pipe tobacco, reducing Federal excise tax collections by $2.36 billion. The amount of RYO taxed as pipe tobacco climbed steadily from April 2009 to June 2012, then levelled off following the July 2012 enactment of the Highway Bill (figure 1).

Figure 1

Market shift in sales of roll-your-own (RYO) and pipe tobacco sales in the USA, April 2008–June 2013.

Discussion

The Federal Highway Bill did halt, at least temporarily, the steady increase in loose tobacco sales (pipe and RYO tobacco combined). However, sales of RYO labelled as pipe tobacco do not appear to be declining, so the Highway Bill was not effective at correcting the market shift that occurred in response to the tax disparity. Even without access to commercial rolling machines, smokers are continuing to take advantage of the tax disparity.

It is not clear from these data how many smokers still make cigarettes using commercial-grade machines sold in stores, or how many of these machines still exist, though the US Treasury Department has pursued legal action against some businesses that have failed to comply with the law. For example, some retailers claimed not to be subject to regulation because they self-identified as a club or non-profit, while others indicated that consumers were ‘renting’ use of the machine.21 However, the US Treasury Department and some states insisted that these retailers would still be classified as manufacturers.19 ,21 ,22 An assessment of the incidence of RYO machines still in stores would clarify this issue; and machines still operating would signal the need for enhanced enforcement.

One limitation of this study is that revenue loss estimates do not account for background trends in pipe tobacco sales prior to April 2009. However, because pipe tobacco sales were slowly declining during this period, the estimates of revenue losses are likely conservative. Another limitation is that this study did not estimate losses sustained by states. However, as established in the authors' previous paper,5 most state taxes on pipe and RYO tobacco are ad valorem (ie, taxed as a percentage of overall product price), consequently, if a lower Federal tax results in lower product prices, that will also result in reduced state excise tax and sales tax collections.

Conclusion

Because the provision included in the Federal Highway Bill only addressed access to commercial rolling machines and did not address the tax disparity between pipe tobacco and RYO tobacco, consumers continue to have access to RYO tobacco labelled as pipe tobacco, a low-cost alternative product. Two approaches exist that will potentially address this issue.

The US Treasury Department could begin distinguishing RYO and pipe tobacco based on physical characteristics, rather than allowing companies to self classify if a product is pipe or roll-your-own based on the label. The absence of clear standards allows manufacturers to label RYO as pipe tobacco to avoid taxes and other regulations. Classifying products using measurable standards would give the agency responsible for collecting RYO taxes the power to determine what products are to be considered RYO. The US Treasury conducted a study of 40 products labelled as pipe tobacco and RYO before the 2009 tax change took effect, that compared physical characteristics of these products.22 Furthermore, in 2010, Treasury proposed and accepted public comment on a regulation that would establish standards to distinguish between pipe tobacco and roll-your-own tobacco based on physical characteristics, however, this regulation has not been finalised.23 In addition to addressing the price disparity, this approach could also address other regulatory issues, specifically the availability of flavoured tobacco. As established previously, there are pipe tobacco products that are sold for RYO purposes that are available in various flavours.5 Even though the Food and Drug Administration (FDA) prohibits the sale of flavoured cigarettes and flavoured RYO, FDA tobacco regulations do not currently apply to pipe tobacco.24

Because tax parity for tobacco products eliminates opportunities for tax avoidance, a direct approach would be to tax RYO and pipe tobacco at the same rate.4 This approach would also expand the public health benefit of the 2009 Federal tobacco tax increase, such as preventing smoking initiation and promoting cessation through increased tobacco product prices. Without a solution, the Federal government and states will continue to lose revenue, and smokers who would otherwise quit will continue to have a low-cost alternative product available for purchase.

What this paper adds?

  • This study found that while a 2012 national law did halt the steady increase in pipe tobacco sales in the USA, the law did not correct the market shift that has occurred since 2009 when a price US$21.95 tax disparity was created between pipe and roll-your-own tobacco.

  • This study illustrates that because the new national law only addressed availability of commercial rolling machines in retail stores—and did not address the tax disparity between pipe tobacco and roll-your-own tobacco—sales of pipe tobacco will likely continue at increased levels.

  • If the tax disparity remains, the Federal government and states will continue to lose revenue, and smokers who would have otherwise quit will continue to have a low-cost alternative product available for purchase.

References

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Supplementary materials

Related Data

Footnotes

  • Correction notice This article has been corrected since it was published Online First. A repeat in the ‘Correspondence to’ section has been deleted.

  • Contributors MAT and DM designed the study. DM conducted the analysis. MAT, DM, TW reviewed and analysed the results. MAT drafted and revised the paper. DM and TW revised the paper.

  • Competing interests None.

  • Provenance and peer review Not commissioned; externally peer reviewed.

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