Tax loophole allows cigarette makers to avoid billions in U.S. tax dollars

Tobacco makers were able to avoid paying billions of dollars in federal excise taxes by reclassifying their “roll-your-own” tobacco products as pipe tobacco, and small cigars as large cigars, according to a new government report .

As a result, Uncle Sam  lost an estimated $2.6 billion to $3.7 billion in tax revenue between April 2009 and February 2014 after passage of the Children’s Health Insurance Program Reauthorization Act (CHIPRA) of 2009 created opportunities for tax avoidance and led to significant market shifts toward lower-taxed products by manufacturers, importers and price-sensitive consumers.

In 2009, Congress renewed the Children’s Health Insurance Program, which provides insurance coverage to more than eight million children each year.To pay for that coverage, Congress raised excise taxes on certain types of tobacco products, including cigarettes and loose, roll-your-own tobacco. The tax rates on tobacco for pipes and some large cigars, however, remained lower. So immediately after the law was enacted, companies pried open a big loophole. They started changing the labels on their packaging. Products that would have been labeled ‘roll-your-own’ tobacco one day were labeled ‘pipe’ tobacco the next, and the tax bill on them plummeted. Companies also stuffed ‘small cigars’ with a few extra grams of tobacco. That way, they’d be considered ‘large cigars’ and be taxed at a lower rate.

Thanks to the tax loophole, sales of pipe tobacco have skyrocketed more than tenfold in just five years. “It seems implausible that so many more Americans would suddenly start smoking pipes.

Jeff Newman represents whistleblowers.