Page 1 GAO-25-107903 Tobacco Taxes
By increasing gaps in tax rates for smoking tobacco products that are similar to
each other, the Children’s Health Insurance Program Reauthorization Act
(CHIPRA) of 2009 created opportunities for tax avoidance through the
substitution of lower-taxed tobacco products for higher-taxed ones. Specifically,
CHIPRA increased the federal excise tax rate on cigarettes and set equivalent
tax rates on roll-your-own tobacco and small cigars, which can be close
substitutes for factory-made cigarettes. As a result, the tax rates for these
products are generally higher than the tax rates for pipe tobacco and large
cigars. In addition, consumers have increasingly purchased e-cigarettes and oral
nicotine pouches that are not federally taxed.
We reported in 2012, 2014, and 2019 that sales of lower-taxed pipe tobacco and
large cigars saw immediate and significant growth following CHIPRA, and we
estimated the amount of revenue lost by the federal government because of
these market shifts. To address this issue, we recommended that Congress
consider equalizing tax rates on pipe tobacco and roll-your-own tobacco. We also
recommended that Congress, 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. As of July 2025, Congress has not passed
legislation to eliminate these tax differentials among smoking tobacco products.
For this report, as part of our work on duplication, overlap, fragmentation, cost
savings, and revenue enhancement in response to a provision in section 21 of
public law 111-139, we reviewed the markets for cigarettes, roll-your-own
tobacco, pipe tobacco, small cigars, and large cigars. We also reviewed how
certain new products affected markets for these traditional smoking tobacco
products. In addition, we examined how much additional revenue the federal
government could collect over the next 5 fiscal years if tobacco tax rate
disparities were eliminated as of fiscal year 2025. Further, we examined how
much revenue the federal government refunded to companies through drawback
claims for taxes paid on tobacco imports that were substituted with similar,
qualifying products later exported or destroyed.
• Federal revenue from tobacco excise taxes has decreased since fiscal year
2014 as sales of smoking tobacco products have declined.
1
The extent to
which the increased use of e-cigarettes and oral nicotine pouches has
affected sales for traditional smoking tobacco products is unknown.
• Tax rate disparities created by CHIPRA in 2009 led to market shifts from
higher-taxed roll-your-own tobacco to lower-taxed pipe tobacco and from
higher-taxed small cigars to lower-taxed large cigars, and these trends have
continued since then.
2
U.S. Government Accountability Office
Federal Revenue Implications
of Tax Rate Differences and Drawback Refunds
GAO
-25-107903
Report to Congressional Committees
