CRS Updates Report on Excise Taxes on Tobacco

The federal tax rate on cigarettes remained unchanged at 8 cents per pack from 1951 to 1982.¹ Since 1982 the rate has been increased by three federal tax acts. The rate was increased to 16 cents per pack as part of the Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248). In the General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982, the Joint Committee on Taxation indicated that the reason for this increase was that inflation had caused the effective level of the tax to decline by more than 70% in constant dollars because the tax was imposed as a set amount, rather than as a percentage of sales price. The doubling of the tax rate did not increase the per- pack tax, in real terms, above the 1951 level. Also, Congress felt that the broad-based increase in revenue required by the fiscal outlook through 1985 mandated an increase in the cigarette excise taxes.

Next, the rates were increased in two stages under the Revenue Reconciliation Act of 1990 (P.L. 101-508). One half of the increase (4 cents per pack) took effect on January 1, 1991 with the second half (an additional 4 cents) in effect as of January 1, 1993. Thus, the Revenue Reconciliation Act of 1990 raised the rates from 16 cents per pack to 24 cents per pack. The rates were increased because of large continuing federal budget deficits and the need for additional federal revenues.

The most recent increase in federal excise tax rates on tobacco products occurred in the Balanced Budget Act of 1997 (P.L. 105-33). Like the increases provided under the Revenue Reconciliation Act of 1990, the tax rates on all tobacco products increased in two stages. The rates first increased on January 1, 2000. The final increase in rates occurred on January 1, 2002. In the case of cigarettes, the first stage increased rates by 10 cents a pack to 34 cents. In the second stage, the rates increased an additional 5 cents a pack to make the federal excise tax 39 cents per pack. In addition, the act established a tax rate for roll-your-own tobacco which is now in effect. Table 1 provides details on the rate increases imposed on all tobacco products for the period 1990 to 2002.²

Revenues

The actual revenue yield from federal tobacco excise taxes remained relatively stable during the 1990s. After the statutory rate increase in 1993 the revenue yield jumped from just over $5 billion in FY1992 to $5.875 billion in FY1993. Fiscal year revenues over the 1993 to 1996 time period have ranged from a low of $5.691 billion to a high of $5.878 billion. The Joint Committee on Taxation estimated that the Balanced Budget Act of 1997's increase in tobacco tax rates would increase revenues beginning in FY2000 (the increased rate is effective for a nine-month period during that fiscal year). At the time of the Balanced Budget Act of 1997's enactment, the Joint Committee estimated that additional revenues of $1.175 billion would be collected in FY2000 due to the first part of the rate increase. Further, the committee estimated that the increased rates would result in more than $2 billion in additional annual revenue by FY2002. As indicated earlier, these projections were made prior to the tobacco Master Settlement Agreement. A detailed breakdown of actual and estimated tobacco tax receipts is provided in Table 2, which appears on the final page of this report.

                Table 1.  Comparison of Tobacco Excise Tax Rates

Tobacco excise taxes are paid into the General Fund of the U.S. Treasury. There continues to be no direct relationship between federal tobacco excise tax collections and any particular federal program. In those cases where other excise taxes are directly linked with spending programs (as through trust funds), there is usually a relationship between the taxed products and a program financed by the funding (such as the gasoline and diesel fuel excise taxes and the Highway Trust Fund). In some cases, excise taxes may be imposed in situations where those actually responsible for damages cannot be held directly accountable (such as the .01 cent excise tax on gasoline used for cleaning up underground leaking storage tanks). In those cases, taxes are levied on current production of a product associated with causing the damages that the government program is trying to rectify.

                  Table 2. Tobacco Excise Tax Estimates and

² As originally enacted, increased revenue collections were to be credited against the total payments to be made under the tobacco industry settlement agreement. However, this provision was repealed under section 519 of the FY1998 Appropriations for Labor, Health and Human Resources (P.L. 105-78).