FDA Ban on Flavored Cigars Could Cost $836 Million in Annual Excise Tax Revenue

August 17, 2022 11:00 am Published by Comments Off on FDA Ban on Flavored Cigars Could Cost $836 Million in Annual Excise Tax Revenue

The FDA’s proposal to ban flavored cigars would be a disruptive force in the cigar market and would carry significant revenue implications for many state governments. Flavored cigars make up between one-third and one-half of all cigar sales. We estimate that the aggregate effect of a ban on flavored cigar sales in the U.S. would be a decline of $836 million in excise tax revenue annually. This estimate does not include lost revenues from state sales taxes or import and customs duties.

On April 28, the FDA introduced a new product standard that would prohibit the sale of menthol cigarettes and flavored cigars. We previously estimated that the ban on menthol cigarettes would eliminate over $6.5 billion in revenue the first year following the ban. The $836 million in lost revenue from flavored cigar excise taxes adds to the lost revenue from menthol cigarettes, meaning the total decline in state and federal revenues from the FDA’s decision to ban menthol cigarettes and flavored cigars could exceed $7.3 billion annually.

In the United States, more than 15 billion cigars are sold each year. Most of those are large cigars or cigarillos, defined for tax purposes as weighing more than 3 pounds per 1,000 cigars. Little cigars, weighing less than 3 pounds per 1,000 cigars, are commonly sold in packs of 20 and account for a smaller share of the market than larger cigars.

Like cigarettes, cigars are taxed by the federal government and state governments. Small cigars carry the same federal tax as cigarettes, $1.01 per pack of 20 cigars. The federal government taxes large cigars 52.75 percent of the manufacturer price up to a maximum of $0.4026 per cigar.

State tax rates vary widely. Florida doesn’t tax cigars at all. Pennsylvania and New Hampshire levy no tax on large cigars, but tax small cigars the same as cigarettes. Washington and Minnesota levy a tax of 95 percent of the manufacturer’s price on large cigars and similarly tax small cigars at the same rate as cigarettes. The following table details the tax rates for each state for both large and small cigars.

FDA Ban on Flavored Cigars Could Cost $836 Million in Annual Excise Cigar Tax Revenue See FDA ban flavored cigars

Preference for flavored cigars also varies significantly by state. In Hawaii, flavored cigar sales are almost nonexistent. In Utah, flavored products comprise the majority of market sales. The combination of different tax rate structures and consumer flavor preferences results in a broad range of state revenue effects from the proposed cigar flavor ban.

Florida would lose no revenue, because Florida imposes no taxes on cigars, and Hawaii’s revenue loss is almost zero because flavored cigars have such a small market share. Midwest states, including Michigan ($27.6 million), Wisconsin ($17.4 million), and Ohio ($16.4 million) that have relatively high cigar consumption, strong preferences for flavored products, and high cigar tax rates would see revenue declines that are only exceeded by California ($29.6 million). We estimate the total revenue decline for all states and the District of Columbia to be as much as $266 million.

The revenue decline for the federal government would be even greater. The federal government would lose $558 million in excise taxes on large cigars and an additional $11 million on excise taxes on little cigars, totaling nearly $570 million.

These revenue losses come with other challenges to governments. Bans, prohibitions, and exceedingly high tax rates fuel black markets and smuggling. The illicit cigarette market is a multibillion-dollar industry.

When Massachusetts banned the sale of menthol in cigarettes in 2020, illicit trade and cross-border shopping for cigarettes skyrocketed. Despite the ban, aggregate sales of cigarettes across the New England region showed no significant decline compared to other regions. Obviously, a nationwide ban would make cigarette smuggling and cross-border shopping more difficult, but the incentives for participation in the black market also grow.

Policymakers and regulators should not ignore the law of unintended consequences as they set tax rates and regulatory regimes for nicotine products. History is full of costly lessons from unforeseen reactions to prohibitions.

If the goal is to reduce smoking, high taxes and product bans are a costly and relatively ineffective means for reaching that goal. Consumers who still demand prohibited products may simply shift consumption to other (potentially more harmful) products, or they may find illegal means of acquiring what they want. The result is a narrowing a tax base, leaving fewer taxpayers to cover the costs of the externalities associated with smoking.

U.S. State Cigar Tax Rates in 2022 and projected One-Year Tax Revenue Declines from a Flavored Cigar Ban
 Tax RatePercent of Sales that are Flavored  
StateLittle CigarsLarge CigarsLittle CigarsLarge CigarsReduction in Annual State Tax CollectionsRank of Revenue Loss
Alabama$0.004$0.0438.942.1$2,312,55829
Alaska75% of wholesale75% of wholesale42.342.3$1,948,36032
Arizona$0.021$0.225052.2$14,021,1745
Arkansas68% of wholesale68% of wholesale41.126.6$5,400,09918
California63.49% of wholesale63.49% of wholesale31.440.8$29,626,8161
Colorado50% of wholesale50% of wholesale6048.1$7,436,44211
Connecticut50% of wholesale (not to exceed $0.50/cigar)50% of wholesale (not to exceed $0.50/cigar)23.446.6$8,039,0319
Delaware30% of wholesale30% of wholesale32.850.6$2,141,85231
District of Columbia$0.25191% of wholesale19.919.9$27,49248
Floridano taxno tax14.840.1$051
Georgia$0.00323% of wholesale34.334.3$3,454,90025
Hawaii$0.1650% of wholesale0.070.07$20350
Idaho40% of wholesale40% of wholesale56.332.4$2,177,03730
Illinois$0.149 / cigar36% of wholesale2638.2$2,482,92828
Indiana24% of wholesale24% of wholesale41.158.5$13,877,1486
Iowa$0.0750% of wholesale (not to exceed $0.50/cigar)34.244$5,302,06920
Kansas10% of wholesale10% of wholesale40.140.9$1,182,90438
Kentucky15% of wholesale15% of wholesale37.740$6,045,64413
Louisiana8% of wholesale20% of wholesale29.442.8$6,747,20012
Maine43% of wholesale43% of wholesale10.563.2$7,645,77810
Maryland70% of wholesale15% of wholesale30.933.1$1,056,51541
Massachusetts40% of wholesale40% of wholesale0.146.5$5,749,24915
Michigan32% of wholesale32% of wholesale (not to exceed $0.50/cigar)23.846.9$27,607,0372
Minnesota$0.15295% of wholesale (not to exceed $0.50/cigar)30.638.7$1,913,55033
Mississippi15% of wholesale15% of wholesale33.737.7$1,341,71537
Missouri10% of wholesale10% of wholesale44.349.7$3,688,78024
Montana50% of wholesale50% of wholesale48.346.9$1,165,26439
Nebraska20% of wholesale20% of wholesale40.949.2$142,26547
Nevada30% of wholesale30% of wholesale36.750.3$3,302,83327
New Hampshire$0.089no tax24.147.4$23,87849
New Jersey30% of wholesale30% of wholesale17.848.7$10,329,6397
New Mexico$0.10025% of wholesale (not to exceed $0.50/cigar)4852.7$1,028,34542
New York$0.21875% of wholesale56.344.9$5,727,69216
North Carolina12.8% of wholesale12.8% of wholesale (not to exceed $0.30/cigar)41.539.9$5,751,93214
North Dakota28% of wholesale28% of wholesale4442.7$523,84244
Ohio37% of wholesale17% of wholesale (not to exceed $0.58/cigar)33.855.7$16,401,8464
Oklahoma$0.102$0.1243.853.2$4,199,37021
Oregon$0.16765% of wholesale (not to exceed $1.00/cigar)39.137.8$5,699,88217
Pennsylvania$0.130no tax42.147.7$938,29843
Rhode Island$0.21380% of wholesale (not to exceed $0.50/cigar)20.251.7$160,87646
South Carolina5% of wholesale5% of wholesale37.254.2$1,352,63635
South Dakota35% of wholesale35% of wholesale3543.2$1,519,86134
Tennessee$0.0316.6% of wholesale40.752$1,348,48536
Texas$0.001$0.0127.930.9$3,427,32326
Utah$0.08586% of wholesale78.960.2$3,998,97922
Vermont$0.15492% of wholesale or $2.00 – $4.00 / cigar2351.9$1,058,89040
Virginia20% of wholesale20% of wholesale39.942.3$5,354,20119
Washington$0.15195% of wholesale (not to exceed $0.65/cigar)33.550.5$10,021,5258
West Virginia12% of wholesale12% of wholesale49.155$3,782,68523
Wisconsin71% of wholesale (not to exceed $0.50/cigar)71% of wholesale (not to exceed $0.50/cigar)40.149.3$17,399,4783
Wyoming20% of wholesale20% of wholesale52.946.2$469,62445
Total All States  33.347.8 $266,356,134  
Sources: United States Department of Treasury, “The Tax Burden on Tobacco,” 2022; states’ departments of revenue; Kuiper et al (2018) and Wang et al (2022), which both aggregate Nielsen sales product scanner data; the Cigar Association of America; and author calculations.

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