FET on Tobacco and Nicotine Products

Last Updated: September 24, 2021

The Issue

Legislation in Congress could substantially raise the federal excise tax (FET) on tobacco and nicotine products. The Tobacco Tax Equity Act (S. 1314/H.R. 2786) proposes to double the FET on cigarettes and to apply tax parity across all other tobacco and nicotine products, which would mean even larger increases. Taxes of this magnitude would push current users to illicit sources.

When Congress passed the Tobacco Control Act in 2009, it gave the Food & Drug Administration (FDA) regulatory authority over the manufacturing and sale of tobacco products. These regulated products go through intense scrutiny to be on the market, and tobacco retailers must comply with legal age requirements among other protocols in order to sell the products in their stores.

However, in the burgeoning illicit tobacco market, sellers operate completely outside of the law offering unregulated products to users of all ages. According to a report from the Virginia State Crime Commission, “All cigarette trafficking schemes, no matter the methods employed, depend upon tax avoidance” as “illegally trafficked cigarettes now have a higher profit margin than cocaine, heroin, marijuana or guns.” In fact, the National Research Council reported in 2015 that U.S. cigarette smuggling is a multibillion-dollar business fed by “large tax differentials between jurisdictions.” The findings showed $3-7 billion lost in state tax revenues and a loss of annual sales between 8.5 to 21%. A study in Tobacco Control found one in five packs of cigarettes is smuggled.

Retail Impact

Convenience store retailers selling tobacco and nicotine products invest resources and time to ensure they are in full compliance with federal, state and local laws. This includes intensive training of employees in proper age verification protocols and how to store and safely stock the product. Additionally, these retailers collect and remit the appropriate taxes.

If an increase in the federal excise tax for tobacco and nicotine products is too large, it creates a problem for society as illicit purveyors will evade the law by selling untaxed and unregulated products. They also will not verify age. This undermines health and tax policy goals as well as the efforts made by responsible retailers.

NACS Position

NACS opposes the proposed increase in the FET on tobacco and nicotine products as proposed in the Tobacco Tax Equity Act.