Excise tax on tobacco products

Excise taxes are generally placed on tobacco products to reduce consumption among current tobacco users and discourage potential new users, especially youth, from starting. In addition, these taxes generate significant revenues for government programs at the federal, state and local levels. According to the CDC, the federal and state tax as a percentage of the retail price of cigarettes accounted for 44.3% in 2019. Meanwhile, the average price of a pack of 20 cigarettes was $5.51 in the same year. On average, the level of taxation is relatively higher for cigarettes than for other tobacco products. Such tax disparities have encouraged an increasing number of consumers to switch over to non-cigarette alternatives, such as smokeless tobacco and electronic vapor products, during the past five years.

Taxes at the federal level are typically raised once every several years, while taxes at the state or local level are raised more frequently. In fact, state-level excise taxes were raised nearly 160 times since 2000, with several states raising taxes more than once during this time. Across all states, the average state-level excise tax reached an estimated $1.91 per pack of 20 cigarettes in 2021. State-level taxes on cigarettes currently range from a low of $0.17 in Missouri to a high of $4.50 in Washington, DC. Local cigarette taxes vary widely as well, with certain cities such as New York City placing additional excise taxes on tobacco products. In 2021, several states raised taxes on cigarettes, including Colorado, Maryland and Oregon. In 2020, Virginia was the only state to raise the tax, doubling it to $0.60.

Federal taxes also make up a significant portion of overall cigarette taxes. The most recent hike in federal taxes occurred in 2009, when the US Government increased its tax on cigarettes from $0.39 per pack to $1.01 per pack, easily the most dramatic increase in the tax's history. Federal excise taxes on cigarettes have remained at $1.01 per pack since then. The 2009 spike in federal excise taxes has had a measurable effect on demand for cigarettes, with total consumption declining 8.3% in 2010, according to data from the Tax Burden on Tobacco.

Over the past several years, the excise tax on tobacco has continued to increase, driven by increases at the state level. Excise taxes have proven to be one of the most effective ways to curb smoking, particularly among young people. In addition, the tax has been beneficial for state revenue and even experiences majority public support from voters.

On April 22, 2021, US Representative Raja Krishnamoorthi introduced the Tobacco Tax Equity Act, which aimed to reduce youth tobacco use through higher taxation of tobacco. More specifically, the act aimed to double taxation on cigarettes and equalize rates on all other tobacco and nicotine products to math the higher rate. According to the Tax Foundation, the increase would result in a substantial increase in demand for chewing tobacco, pipe tobacco and snuff. At the same time, states would lose $689.0 million in revenue from excise taxes on tobacco products due to lower demand. The Tobacco Tax Equity Act has been reintroduced in 2023 Consequently, if the bill gets passed and signed into law, this will substantially increase the excise tax on tobacco in the outlook period.

Industry outlook

The excise tax on tobacco at the federal level is expected to increase during the outlook period, driven by historical trends, an increasingly stringent regulatory environment surrounding cigarette sales and tobacco use as well as the high national debt. The introduction of the Tobacco Tax Equity Act of 2023 has increased the chance of the tax being raised in the next five years. Consequently, if the bill gets passed and signed into law, this will substantially increase the excise tax on tobacco over the five years to 2030. Although the forecast incorporates certain tobacco trends and political factors, it does not include the potential effects of the Tobacco Tax Equity Act. Under normal conditions, excise taxes on tobacco are expected to grow at an annualized rate of 4.5% to $3.47 per pack of cigarettes in 2030.