Smokers dodge cigarette tax by switching to pipes, cigars

WASHINGTON�American smokers have shifted to pipe tobacco and large cigars since federal taxes on cigarettes were increased in 2009, a new government report concludes.

Sales of pipe tobacco and large cigars, both taxed at a lower rate, have soared as smokers have adjusted their buying habits to the new price structure.

The shift cost the federal government $615 million to $1.1 billion in uncollected tax revenue from April 2009 to September 2011, the report said. It did not estimate how much individual states may have lost in uncollected taxes.

"That's real money and a tax avoidance scheme Congress ought to be interested in stopping," said Gregg Haifley, associate director of federal relations at the American Cancer Society's Cancer Action Network. "It's also counterproductive for the public health benefit of tobacco taxes."

Monthly sales of pipe tobacco increased from about 240,000 pounds in January 2009 to more than 3 million pounds in September 2011, the Government Accountability Office found. Monthly sales of large cigars more than doubled, from 411 million pounds to more than 1 billion pounds.

Pipe tobacco is used increasingly to make relatively inexpensive cartons of roll-your-own cigarettes in machines installed in neighborhood smoke shops around the nation.

Congress raised taxes on roll-your-own tobacco and cigarette packs in April 2009, making them equal. It enacted a smaller increase for pipe tobacco.

Congress began taxing small cigars at the same rate as cigarettes. Manufacturers of small cigars increased the weight of many of their products, so they would qualify as lower-taxed large cigars, even though they often are just slightly larger than cigarettes and have filters. Premium handmade large cigars retail for $3 to $20 or more each, but "smaller factory-made cigars that meet the legal definition of a large cigar can cost as little as 7 cents per cigar," the GAO reported.

Liggett CEO Ron Bernstein, whose company sells discount cigarettes that are taxed at the higher rate, said his company estimates the tax loopholes have cost the government even more. About 2.7 million people purchased roll-your-own cigarettes last year, and that could reach 3 million in 2012, he said, citing data from the Treasury Department and Centers for Diseases Control and Prevention.

In a written response to the report, Treasury officials noted that the numbers "are not actual losses of revenues, but rather your estimates of the revenue increases if Congress were to change the law to eliminate the disparities."

That's the GAO's recommendation: fix the disparities.

According to the GAO report, a woman representing one tobacco company said she knew of no difference between the roll-your-own tobacco her firm formerly produced and the pipe tobacco it switched to making � other than the federal excise tax.

Sen. Tom Harkin, D-Iowa, has 15 co-sponsors for legislation that would eliminate the tax disparities to help fund the Individuals with Disabilities Education Act, but the bill is stuck in the Senate Finance Committee.