Excise Taxes on Other Tobacco Products (OTP) (Position Paper)
The American Academy of Family Physicians encourages states and the federal government to tax cigarettes well above the current levels, and to set the state and federal excise tax rates on all other tobacco products at parallel rates to cigarette taxes. The AAFP also believes the definition of “cigarette” should be amended to assure it truly includes all types of cigarettes on the market which may be improperly labeled “little cigars” or “filtered little cigars” to avoid higher tax rates.
Assuring tax rates on tobacco products other than cigarettes (OTP) are set at levels that parallel the cigarette tax rate can be accomplished by establishing a percentage-of-price tax rate with a minimum tax rate for each type of product that is linked to the cigarette-tax rate so that the tax on OTP will automatically increase with future cigarette-tax increases. The minimum tax on products would guarantee that the tax on lower priced products will be sufficient compared to premium brands. For single unit/single dose tobacco products, the tax would be based on a per unit or per standard-package basis comparable to the cigarette-tax rate for a single cigarette or a package of cigarettes.
Further, states with percentage-of-price tax rates on OTP should resist the legislative efforts of segments of the tobacco industry to change the taxing methodology to a simple weight-based tax. Federal and state weight-based taxes on OTP should be converted to a percentage-of-price tax with a minimum tax linked to the cigarette tax.
The AAFP also supports the implementation of high-tech tobacco tax stamps by states and the federal government, and other cost-effective measures to prevent and reduce tobacco-product smuggling and other tobacco-tax evasion. These measures include licensing tobacco retailers and adequate funding for enforcement.
Background and Rationale
One of the most effective approaches to discourage cigarette smoking has been to increase cigarette taxes.(1) Both state and federal governments have progressively increased taxes on cigarettes mostly to boost revenues. But it has also produced a significant reduction in smoking among adults and especially children who are most sensitive to increased cost. There is also evidence demonstrating that increasing taxes on smokeless products produces a similar effect.(2)
A wave of local and state smoke-free laws has spread across America, and with their progressive enactment, public smoking venues are less available. Smokers are tempted to replace smoking with smokeless tobacco to maintain their addiction, and many novel tobacco products are now marketed as options for use when smoking is not permitted. These products facilitate continued tobacco use and nicotine dependence instead of quitting. Sales of smokeless-tobacco products have increased as sales of cigarettes have fallen.(3,4,5)
Smokeless-tobacco products are addictive, and though their exclusive use may confer some harm-reduction benefits compared with combustible tobacco, smokeless products are not safe; dual use is quite common, and these products serve as a gateway to tobacco addiction for children and youth.(6,7,8,9,10) But smokeless tobacco is greatly more affordable than cigarettes because the tax on smokeless products is proportionately much lower than the tax on cigarettes. The same is true for loose pipe tobacco, roll-your-own tobacco, and cigars. Together with smokeless tobacco, these products are known as “other tobacco products” (OTP).
Unlike the cigarette tax that is charged per pack, smokeless products are taxed in most states on a percentage-of-wholesale price basis. Taxing this diverse group of products with their varying design, weights, and package amounts by this method makes the most sense; it creates a fair tax rate that keeps up with price inflation. However, it is also important to assure that the percentage-of-price tax rates on smokeless products and the cigarette tax are comparable by linking smokeless-tobacco tax rates with the cigarette tax so that the smokeless-tobacco tax rates rise automatically with future tax increases on cigarettes.
Additionally, a minimum OTP tax should be implemented to ensure that lower-cost tobacco products pay an adequate amount of tax as compared to premium brands (discussed more specifically below). The tax on each smokeless product would then be the higher of the minimum tax rate or the percentage-of-price rate. Tax equality would minimize shifts in use to cheaper products, especially among children.(11)
Above all, states should reject legislative efforts to change from a percentage-of-price taxing method for smokeless-tobacco products to a simple weight-based formula. Much of the push for this change is due to competition within the tobacco industry. This legislative effort is led by the segment of the tobacco industry that produces the higher-cost premium moist snuff brands.(11)
Under a weight-based tax, moist snuff products are taxed at the same rate regardless of price, thus increasing the effective tax on lower-priced products while reducing the effective tax on premium brands which is most popular with youth. One solution to address the tobacco industry’s concerns, but without switching to a simple weight-based tax system, would be to combine the percentage-of-price method with a reasonable minimum tax to assure some measure of cost parity between lower-cost and premium brands on the market.(11,12) Another viable option would be for states to allow for regulatory adjustments to the OTP tax rates, thereby creating another mechanism that could allow these taxes to remain in line with inflation and cigarette tax rates. In this method, each kind of OTP could be taxed individually with specific tax brackets for each OTP variety.
The carrot held out to legislators for the weight-based tax is the opportunity to increase the overall tax (and state revenues) for moist snuff products immediately. However, the initial higher tax will not keep up with price inflation bringing the state increasingly lower revenues as compared with a percentage-of-price tax.
Weight-based taxing would also greatly under-tax the new generation of super-light-weight smokeless products being specifically promoted and designed for youth consumption. Examples include spit-less pre-packaged snus and dissolvable candy-like tobacco products including Orbs, strips, and sticks. These extremely low-weight products would have almost no tax placed on them under a weight-based system.(13,14) If taxes were based on product type, however, snus and dissolvable tobacco products could receive a much higher tax per ounce than other products.
Other tax inequities for OTP include lower relative taxes on loose pipe tobacco, roll-your-own tobacco, and cigars (especially little cigars, as previously mentioned) that should also be corrected by similar methodologies including a minimum tax on these products.(15,16)
The bottom line: Simple weight-based taxing of tobacco products must be avoided and taxes on all tobacco products should be roughly comparable to the amount placed on cigarettes. This will discourage use of lower-priced OTP and better discourage initiation of tobacco use among children.
- Report of The Independent Task Force on Community Preventative Services. Hopkins DP, et al. “Evidence Reviews and Recommendations on Interventions to Reduce Tobacco Smoke: A Summary of Selected Guidelines,” American Journal of Preventative Medicine 20(2S: 67-87, 2001.
- Chaloupka F, et al. “Public Policy and Youth Smokeless Tobacco Use,” Southern Economic Journal 64(2): 503-516, 1997.
- CDC Youth Risk Behavior Surveillance – United States, 2009, Morbidity and Mortality Weekly Report Surveillance Summaries 59(SS-5), June 4, 2010.
- Tomar SL, Albert HR, and Connelly GN. “Patterns of Dual Use of Cigarettes and Smokeless Tobacco among U.S. Males: Findings from National Surveys,” Tobacco Control 19:104-109, 2010.
- U.S. Alcohol and Tobacco Tax and Trade Bureau Tobacco Statistics. Go to www.ttb.gov/tobacco/tobacco stats.shtml.
- Henley SL, et al. “Tobacco-Related Disease Mortality Among Men Who Switched From Cigarettes to Spit Tobacco,” Tobacco Control 16:22-28, February 2007.
- U.S. Department of Health and Human Services. “The Health Consequences of Using Smokeless Tobacco: A Report of the Committee to the Surgeon General,” Bethesda, MD. NIH Pub No. 86-2874, April, 1986.
- HHS, Public Health Service National Toxicology Program, Report on Carcinogens, Eleventh Edition, January 31, 2005National Institutes.