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CRS SUMMARIZES OBRA INCREASE ON TOBACCO TAX.

DEC. 27, 1990

90-637E

DATED DEC. 27, 1990
DOCUMENT ATTRIBUTES
  • Authors
    Talley, Louis Alan
  • Institutional Authors
    Congressional Research Service
  • Code Sections
  • Index Terms
    tobacco
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 91-104
  • Tax Analysts Electronic Citation
    91 TNT 3-21
Citations: 90-637E

Taxes on Tobacco Products: Increases under the RRA of 1990

                          December 27, 1990

 

 

                          Louis Alan Talley

 

                     Research Analyst in Taxation

 

                         Economics Division

 

 

SUMMARY

This report examines the recently passed increases in excise tax rates on tobacco products as contained in the Revenue Reconciliation Act of 1990 (Public Law 101-508). These tax rates were increased because of large continuing Federal budget deficits and the need for additional Federal revenues. These new tax rates become effective in two stages. The first scheduled increase in rates is effective January 1, 1991, while the second increase occurs January 1, 1993.

The total rate increase is set to equal a 50 percent increase in existing tax rates, one-half the total increase to go into effect in 1991 and one half in 1993. The excise tax on large cigars will be based on the manufacturer's or importer's price, rather than the wholesale price. The Joint Committee on Taxation has estimated that these changes will increase revenues by $5.876 billion for the period FY91-95. Revenues collected from all tobacco excise taxes go into the general receipts of the United States Treasury.

TAX RATES

The tax rate on cigarettes had remained unchanged from 1951 to 1982. Since 1982 the rates have been increased twice. The rate was increased to 16 cents per pack as part of the Tax Equity and Fiscal Responsibility Act of 1982 (Public Law 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 the increase was that since the tax was imposed as a set amount, rather than as a percentage of sales price, the effective level of the the tax had declined by more than 70 percent in constant dollars and therefore the Congress felt that an adjustment was appropriate. As such, 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 through fiscal year 1985.

Under the Revenue Reconciliation Act of 1990 (RRA 90) the total rate increase on all tobacco products is set to equal 50 percent. One half of the increase takes effect on January 1, 1991 and the second half becomes effective on January 1, 1993. These rates were increased because of large continuing Federal budget deficits and the need for additional revenues. The following table provides these tax rates both before and after passage of the RRA 90.

            TABLE 1. COMPARISON OF TOBACCO EXCISE TAX RATES

 

 ______________________________________________________________________

 

                          Statutory       Statutory       Statutory

 

 Commodity              Rate -- 1990    Rate -- 1991    Rate -- 1993

 

 _________              ____________    ____________    ____________

 

 

 Cigarettes, small      $8.00 per       $10.00 per      $12.00 per

 

 (Class A)              thousand (16    thousand (20    thousand (24

 

                        cents per pack) cents per pack) cents per pack)

 

 

 Cigarettes, large      $16.80 per      $21.00 per      $25.20 per

 

 (Class B)              thousand        thousand        thousand

 

 

 Large cigars, whole-   8.5 percent     10.625 percent  12.75 percent

 

 sale price not more    of wholesale    of wholesale    of wholesale

 

 than $235.294 per      price (but not  price (but not  price (but not

 

 thousand               more than $20   more than $25   more than $30

 

                        per thousand)   per thousand)   per thousand)

 

 

 Small cigars           $0.75 per       $0.9375 per     $1.125 per

 

                        thousand        thousand        thousand

 

 

 Imported cigars,       Collected by    Collected by    Collected by

 

 cigarettes, cigarette  Customs, rates  Customs, rates  Customs, rates

 

 papers, and cigarette  same as         same as         same as

 

 tubes                  domestic        domestic        domestic

 

 

 Cigarette papers       0.500 cent      0.625 cent      0.750 cent

 

                        per 50          per 50          per 50

 

 

 Cigarette tubes        1.0 cents       1.25 cents      1.5 cents

 

                        per 50          per 50          per 50

 

 

 Snuff                  24 cents        30 cents        36 cents

 

                        per pound       per pound       per pound

 

 

 Chewing tobacco        8 cents         10 cents        12 cents

 

                        per pound       per pound       per pound

 

 

 Pipe tobacco           45 cents        56.25 cents      67.5 cents

 

                        per pound       per pound        per pound

 

 ______________________________________________________________________

 

 Previously, the rate of tax imposed on large cigars has been based on

 

 a percentage of the wholesale price. As of January 1, 1991 the

 

 percentage will be based on the price for which they are sold by a

 

 manufacturer or importer.

 

 

REVENUES

The revenue yield from total Federal tobacco excise taxes in fiscal year 1989 was $4,290,280,000. The Joint Committee on Taxation has estimated that the higher excise tax rates on tobacco products under provisions of the Revenue Reconciliation Act of 1990 will lead to an increase in revenues of $5.876 billion for the period FY91-95. Broken down by year the expected additional revenues are $0.542 billion in FY91, $0.792 billion in FY92, $1.546 in FY93, $1.519 billion in FY94, and $1.477 billion in FY95.

In addition to the excise taxes on various tobacco products there is also an occupational tax. A manufacturer or exporter of taxable tobacco products with gross receipts of less than half a million dollars in the preceding taxable year must pay a tax of $500 a year. For those whose gross receipts exceed that amount the tax is $1,000 a year per business premise.

Revenues collected from all tobacco excise taxes go into the general receipts of the United States Treasury. As such, these revenues are not specifically dedicated for any trust fund. The rationale for the recently legislated increase in these taxes was for budget reduction purposes. There have been several other suggested proposals made in recent years to dedicate the excise taxes on tobacco products for various purposes. For example, it has been suggested that the revenues collected from tobacco excise taxes be used to help finance the Medicare/Medicaid Trust Fund. In the case of the Medicare/Medicaid Trust Fund proposal, the rationale given has been that the abuse of tobacco products early in life may lead to health related problems such as emphysema, heart disease, or lung cancer which in turn drains receipts from those trust funds for health expenditures. Suggestions have also been made that tobacco receipts be used for President Bush's declared war on drugs.

POLICY ARGUMENTS

Arguments that were made for increasing tobacco excise taxes were that they can raise substantial and stable amounts of revenues while the cost of tax administration in relation to revenue is small. It is also argued that it is impossible for wealthy taxpayers to avoid this tax through "loopholes" or other income tax reduction or saving devices. Likewise, the tax falls on all persons who use these products, and many people believe that even lower income individuals should contribute to the support of the Federal Government. Not only should ability-to-pay be a factor of taxation but also the ability to spend and consume. The fact that a person with limited resources spends funds for a nonessential is considered sufficient reason for imposition of a tax and an ability to support the national government in the same proportion as the amount purchased and consumed. These excise taxes have long been justified as a "user tax." In the case of tobacco, society pays a cost in lost work time from smoking related illnesses. There are those that would like to see an increase in revenues to help pay for medical services and the attendant costs to society.

There were several arguments made against increasing the excise taxes on tobacco products. An increase in rates can be expected to decrease consumption. Decreased consumption will affect State tax revenues unless the States further raise their own excise tax rates (which could lead to still lower rates of consumption). It was also argued that a decrease in consumption can be expected to cause a loss of employment in the tobacco industry along with related industries such as trucking and packaging. Finally, an argument was made against the tax rate increases based on equity. Equity is generally considered to mean taxation based on ability-to-pay. These types of excises are considered to be regressive because individuals with lower incomes will spend a larger portion of their income than a higher income person for the same consumption amount.

DOCUMENT ATTRIBUTES
  • Authors
    Talley, Louis Alan
  • Institutional Authors
    Congressional Research Service
  • Code Sections
  • Index Terms
    tobacco
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 91-104
  • Tax Analysts Electronic Citation
    91 TNT 3-21
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