In this second part of the halftime report for Tax Foundation Forum: Making Sense of Profit Shifting, we discuss the key takeaways from the first half of our series on profit shifting (read part I here). In this post, we...
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- Tax Roll-Your-Own, Consumers Just Switch to Pipe Tobacco
Tax Roll-Your-Own, Consumers Just Switch to Pipe Tobacco
The GAO recently released a report on tobacco taxes in which they determine that the disparities between the excise tax rates of roll-your-own tobacco and pipe tobacco has led to a substantial market shift from the former to the latter. Additionally, the differential treatment of large cigars and small cigars has led to a spike in the sale of large cigars.
Below is a graph from the report, showing the changes in the sales of roll-your-own tobacco vis a vis pipe tobacco, as well as the change in large cigars vs. small cigars as a result of the passage of CHIPRA in 2009).
This change was driven by the fact that CHIPRA substantially raised rates on cigarettes, roll-your-own tobacco, and small cigars, but did not raise taxes on pipe tobacco to equivalent rates. Below are the tax rate changes from CHIPRA (large cigars are not taxed per stick, but are taxed by price, so are not included in this graph):
The biggest reason for these consumption shifts is that the definitions of roll-your-own tobacco and pipe tobacco are virtually indistinguishable; they mostly concern how the product is packaged and how it is "likely to be smoked." In many cases, roll-your-own makers took exactly the same tobacco product and just changed the label to read "pipe tobacco."
The main take away from this report is that taxes substantially affect consumer and industry behavior. People naturally respond to price changes to avoid taxes. If you tax cigarettes heavily, consumers move to roll-your-own tobacco. When you tax roll-your-own tobacco, consumers move to pipe tobacco. Further, if you tax any product at a prohibitive rate, people will turn to the black market.
More on tobacco taxes here.
Follow Scott Drenkard on Twitter @Scott Drenkard.
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