July 29,2014

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Wyden Calls for Action to Close Tobacco Tax Loophole

Finance Chairman Says Loophole Has Cost Taxpayers More Than $2 Billion, Hurts Kids and Teens

WASHINGTON –Senate Finance Committee Chairman Ron Wyden, D-Ore., at a hearing today called to end a loophole in the labeling of tobacco products that has cost American taxpayers more than $2 billion and hurt efforts to keep tobacco out of the hands of children.

“My bottom line is that this loophole hurts taxpayers and kids, and it needs to be closed. Dozens of companies that make tobacco products are dodging taxes simply by changing a few words on packaging labels,” Wyden said. “As a result, America’s taxpayers have taken a hit worth billions of dollars, and children and teens are more exposed to tobacco and its harmful effects.”

To pay for the bipartisan Children's Health Insurance Program Reauthorization Act (CHIPRA) passed in 2009, Congress increased excise tax rates on certain types of tobacco, including cigarettes and loose “roll-your-own” (RYO) tobacco. In response to this tax change, certain manufacturers began mislabeling RYO tobacco as “pipe tobacco,” which is subject to a significantly lower tax rate.  Sales of pipe tobacco have skyrocketed -- more than tenfold in just five years, resulting in an estimated $2.6 billion to $3.7 billion in lost revenue, according to the Government Accountability Office (GAO). Companies also stuffed “small cigars” with a few extra grams of tobacco to be classified as “large cigars” and face a lower tax rate. The committee heard that in at least one case, a manufacturer added kitty litter to cigar filters to increase weight. 

After five years, the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau (TTB) still has not developed clear standards to differentiate between tobacco products, disregarding any distinction except for the words on the package: “roll-your-own” or “pipe.” TTB hasn’t followed through on solving this problem and lacks resources to effectively enforce the law, with only four criminal agents enforcing tobacco, alcohol, and firearms taxes for the entire country.

Wyden said the loophole seriously undermines efforts to discourage smoking among America’s children and teens, keeping prices down and making tobacco more available for the very population the law is trying to protect.

“Evidence shows that raising the cost of cigarettes stops kids from smoking,” Wyden said. “But when tobacco is cheap because of a blatant loophole, young people will buy it.”

Witnesses at today’s hearing included John J. Manfreda, administrator of the Alcohol and Tobacco Tax and Trade Bureau; David B. Gootnick, director of international affairs and trade for the Government Accountability Office;  Ronald J. Bernstein, president and CEO of Liggett Vector Brands LLC; Rocky Patel, owner of Rocky Patel Premium Cigars Inc. and board member of Cigar Rights of America; Michael Tynan, policy offer for the Oregon Public Health Division; and Scott Drenkard, economist and manager of state projects for the Tax Foundation. Their testimony is available here.

The full text of Wyden’s statement is available here.