Feds lose 'at least $1.5 billion' in tobacco tax revenue due to consumer changes and old policies

The federal government is missing out on collecting about $1.5 billion in tobacco tax revenue due to inconsistent tax policies, the Government Accountability Office found in a new report.

"Pipe tobacco and some large cigars are taxed at lower rates than cigarettes, roll-your-own tobacco, and small cigars. As a result, the federal government is not collecting the revenue it would if taxes were the same for these smoking tobacco products," the GAO found in its report titled "Tobacco Taxes: Federal Revenue Implications of Tax Rate Differences and Drawback Refunds."

"For example, the government could raise at least an additional $1.5 billion over 5 years if tax rates for pipe tobacco and roll-your-own tobacco were equal," the GAO reported.

The GAO noted that consumers are now using more e-cigarettes and oral nicotine pouches, which are not federally taxed.

As traditional tobacco products decline in popularity, so does tax revenue

The watchdog warned that tax revenue from traditional tobacco products could further decline heading into the future as e-cigarettes continue to gain in popularity.

Federal revenue from tobacco excise taxes has already gone down from about $14 billion in fiscal year 2014 to $9 billion in fiscal year 2024, the watchdog found.

"GAO estimated that if the tax rate for pipe tobacco were the same as the roll-your-own tobacco rate, the federal government could collect at least $1.5 billion dollars in additional revenue for both products from fiscal year 2025 through fiscal year 2029," the report said.

"Similarly, federal revenue would likely increase if the minimum tax rate for large cigars were the same as the small cigar rate. However, a precise estimate is challenging to determine because of limited information about the retail prices of large cigars and consumer response to increased taxes," the report also found.

In 2012, GAO formally recommended that Congress "consider equalizing tax rates on roll-your-own tobacco and pipe tobacco and, in consultation with the Department of the Treasury, consider options for reducing tax avoidance related to the different tax rates for small and large cigars." The GAO's 13-year-old tobacco tax policy recommendation has still not been adopted. 

Public health an upside

Adam Hoffer, director of excise tax policy at the Tax Foundation, told Just the News that the GAO report's conclusions support several of the Tax Foundation's findings. 

"Specifically, tobacco taxes drive consumers to alternative products that carry a lower (or no) tax. Also, tax revenues have been declining for decades because fewer people smoke each year," Hoffer said.

"This is a resounding win for public health. From a fiscal standpoint, the government should wean itself off tobacco tax revenues because the tax base is going to continue to shrink over time," he added.