Federal Tobacco Tax Revenue May Be Shorted by Rate Disparities and Refund Programs

According to the U.S. Government Accountability Office (GAO), significant differences in federal tax rates between similar tobacco products, coupled with an expanded refund program for exported goods, may be contributing to lower-than-expected federal revenue. The GAO’s findings indicate that these disparities, particularly between pipe tobacco, roll-your-own tobacco, and certain types of cigars, have led to market shifts and opportunities for tax avoidance. Furthermore, the increasing use of untaxed products like e-cigarettes and oral nicotine pouches could lead to further declines in tobacco tax revenue.

The GAO’s analysis, published on August 20, 2025, reveals that following the enactment of the Children’s Health Insurance Program Reauthorization Act (CHIPRA) of 2009, which adjusted federal excise tax rates, substantial differences emerged between the taxation of various smoking tobacco products. This created an incentive for both manufacturers and consumers to opt for products with lower tax burdens. For instance, pipe tobacco and some larger cigars continue to be taxed at lower rates compared to cigarettes, roll-your-own tobacco, and small cigars. This trend has persisted, with pipe tobacco and large cigars remaining dominant in their respective market segments.

Federal revenue generated from tobacco excise taxes has seen a notable decrease, falling from approximately $14 billion in fiscal year 2014 to $9 billion in fiscal year 2024. This decline is attributed to the general reduction in the sales of traditional smoking tobacco products. The extent to which the growing popularity of e-cigarettes and oral nicotine pouches, which are not currently subject to federal taxation, is impacting the market for conventional tobacco products remains unclear.

The GAO has projected that if the federal tax rate for pipe tobacco were aligned with the current rate for roll-your-own tobacco, the government could potentially collect at least an additional $1.5 billion in revenue between fiscal years 2025 and 2029. Similarly, an increase in the minimum tax rate for large cigars to match that of small cigars is also expected to boost federal revenue. However, accurately quantifying this potential revenue is complicated by a lack of detailed information regarding the retail prices of large cigars and how consumers might react to a tax increase.

Beyond tax rate differences, the GAO also examined the impact of the drawback program, which allows companies to receive refunds of federal taxes paid on imported goods that are subsequently exported or destroyed. Officials from U.S. Customs and Border Protection (CBP) have reported an increase in drawback claims since the Trade Facilitation and Trade Enforcement Act of 2015 broadened eligibility for the program. Between fiscal years 2019 and 2024, CBP refunded a total of $312 million in federal taxes for smoking tobacco products through this program. Notably, the amount of drawback refund requests for these products has been on an upward trajectory since fiscal year 2020, with such requests reaching approximately $392 million in fiscal year 2024 alone.

This situation has led the GAO to reiterate recommendations made in previous reports from 2012, 2014, and 2019. These recommendations include urging Congress to consider equalizing tax rates on roll-your-own tobacco and pipe tobacco, and to explore options for mitigating tax avoidance related to differing tax rates for small and large cigars in consultation with the Department of the Treasury. As of July 2025, no legislative action had been taken to address these tax rate differentials.

Article by Mel Anara, based upon information from the U.S. Government Accountability Office

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