New taxes on pipes and cigars?

According to Bloomberg, President Obama will be proposing new tobacco taxes to fund pre-kindergarten programs:

Obama’s 2014 budget proposal, to be released April 10, would finance a pre-kindergarten program for 4-year-olds with higher taxes on cigarettes and other tobacco products. The president outlined the program in his annual State of the Union speech to Congress. He’s seeking to increase spending in areas such as education while Republican lawmakers are pushing for additional budget cuts as a way to reduce the federal deficit.

White House spokesman Jay Carney declined to elaborate on the proposed tobacco-tax increase. “Wait for specifics,” he told reporters at a briefing yesterday.

Never mind for now that cigarette smokers already suffered a more than doubling of the federal tax in Obama’s first year in office. The “other tobacco products” part of this proposal is reason to worry for those who enjoy pipes and cigars.

The 2009 tobacco tax increases to fund the Children’s Health Insurance Program created some significant disparities among similar products. Pipe tobacco was taxed at a far lower rate than roll-your-own (RYO). Large cigars sometimes get much more favorable treatment than small cigars. As a result, producers and consumers shifted to pipe tobacco instead of RYO and added just enough weight to small cigars to qualify as large. The distorting effects of these taxes were immediate and striking:

These changes are almost entirely a matter of legal classification. Actual consumption patterns haven’t changed in the way the chart suggests. Neither pipes nor premium cigars have enjoyed an explosion of new consumers as a result of these taxes.

Nonetheless, the government wants to fix this disparity. A report from the General Accounting Office, the source of the chart above (PDF), estimates that in the first two years of new taxes these substitution effects may have cost the treasury up to $1.1 billion.

One way to fix the disparity would be to lower taxes on RYO and small cigars, but that’s not going to happen. So don’t be at all surprised if the proposal from the Obama Administration includes tax hikes on pipe tobacco and large cigars, imposing substantial new costs on consumers and retailers.

For more, read Michael Siegel’s take on the tax proposal. And for a longer explanation of how smoking bans, higher taxes, and FDA regulation threaten the premium cigar industry, see my December article in The Atlantic.

Update 4/10/13: Via International Premium Cigar and Pipe Retailers on Facebook, this is apparently the language in the budget proposal:

Increase tobacco taxes and index for inflation

Under current law, cigarettes are taxed at a rate of $50.33 per 1,000 cigarettes. This is equivalent to just under $1.01 per pack, or approximately $22.88 per pound of tobacco. Taxes on other tobacco products range from $0.5033 per pound for chewing tobacco to $24.78 per pound of roll your-own tobacco.

The Administration proposes to increase the tax on cigarettes to $97.65 per 1,000 cigarettes, or about $1.95 per pack, increase all other tobacco taxes by about the same proportion, and index the taxes for inflation after 2014. The Administration also proposes to clarify that roll-your-own tobacco includes any processed tobacco that is removed for delivery to anyone other than a manufacturer of tobacco products or exporter. The rate increases would be effective for articles held for sale or removed after December 31, 2013.

As predicted, all loose tobacco would be treated equally, resulting in a huge tax increase for pipe smokers. Details on cigars are lacking, but it looks they would be hit too.


5 thoughts on “New taxes on pipes and cigars?”

  1. A premium hand rolled cigar, is an item of luxury, a craft, a jewel blended for enjoyment by very few. Cigars need to be exempt of such taxes. The last true mom and pop shops left in America are brick and morter cigar shops. There are over 8000 families in the U.S. that depend on these shops. Taxing Premium Long Filler Cigars will just hurt more people. Cigars need to be out of the loop. Completely !

  2. The government needs to get to the root of the problem. Telling kids they shouldn’t smoke cigarettes. That’s why they start in the first place.

    I don’t see why cigars and pipe tobacco is being included in this taxing as neither have been known to cause lung cancer on their own and typically they elongate a person’s life by two years. Cigars and pipes really don’t have any additives aside from a bit of sugar, possible casing/top dressings, and agents to keep them moist until purchase.

    I can’t really see a teenage or pre-teen kid these days getting into cigars or pipe smoking. There’s way too many steps involved in keeping them and enjoying them. and seriously this is all that this is about.

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  3. That is NOT the language in the budget proposal. The budget proposal on only mentions the cigarette tax increase of 0.94 cents per pack. It DOES NOT mention any increases to large cigars, small cigars, RYO or pipe tobacco.

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