CRS SUMMARIZES OBRA INCREASE ON TOBACCO TAX.
90-637E
- AuthorsTalley, Louis Alan
- Institutional AuthorsCongressional Research Service
- Code Sections
- Index Termstobacco
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 91-104
- Tax Analysts Electronic Citation91 TNT 3-21
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.
- AuthorsTalley, Louis Alan
- Institutional AuthorsCongressional Research Service
- Code Sections
- Index Termstobacco
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 91-104
- Tax Analysts Electronic Citation91 TNT 3-21