FDA Ban on Flavored Cigars Could Cost $836 Million in Annual Excise Tax Revenue

Taxes

The FDA’s proposal to ban flavored cigars would be a disruptive force in the cigar market and would carry significant revenue implications for many state governments. Flavored cigars make up between one-third and one-half of all cigar sales. We estimate that the aggregate effect of a ban on flavored cigar sales in the U.S. would be a decline of $836 million in excise tax revenue annually. This estimate does not include lost revenues from state sales taxes or import and customs duties.

On April 28, the FDA introduced a new product standard that would prohibit the sale of menthol cigarettes and flavored cigars. We previously estimated that the ban on menthol cigarettes would eliminate over $6.5 billion in revenue the first year following the ban. The $836 million in lost revenue from flavored cigar excise taxes adds to the lost revenue from menthol cigarettes, meaning the total decline in state and federal revenues from the FDA’s decision to ban menthol cigarettes and flavored cigars could exceed $7.3 billion annually.

In the United States, more than 15 billion cigars are sold each year. Most of those are large cigars or cigarillos, defined for tax purposes as weighing more than 3 pounds per 1,000 cigars. Little cigars, weighing less than 3 pounds per 1,000 cigars, are commonly sold in packs of 20 and account for a smaller share of the market than larger cigars.

Like cigarettes, cigars are taxed by the federal government and state governments. Small cigars carry the same federal tax as cigarettes, $1.01 per pack of 20 cigars. The federal government taxes large cigars 52.75 percent of the manufacturer price up to a maximum of $0.4026 per cigar.

State tax rates vary widely. Florida doesn’t tax cigars at all. Pennsylvania and New Hampshire levy no tax on large cigars, but tax small cigars the same as cigarettes. Washington and Minnesota levy a tax of 95 percent of the manufacturer’s price on large cigars and similarly tax small cigars at the same rate as cigarettes. The following table details the tax rates for each state for both large and small cigars.

Preference for flavored cigars also varies significantly by state. In Hawaii, flavored cigar sales are almost nonexistent. In Utah, flavored products comprise the majority of market sales. The combination of different tax rate structures and consumer flavor preferences results in a broad range of state revenue effects from the proposed cigar flavor ban.

Florida would lose no revenue, because Florida imposes no taxes on cigars, and Hawaii’s revenue loss is almost zero because flavored cigars have such a small market share. Midwest states, including Michigan ($27.6 million), Wisconsin ($17.4 million), and Ohio ($16.4 million) that have relatively high cigar consumption, strong preferences for flavored products, and high cigar tax rates would see revenue declines that are only exceeded by California ($29.6 million). We estimate the total revenue decline for all states and the District of Columbia to be as much as $266 million.

The revenue decline for the federal government would be even greater. The federal government would lose $558 million in excise taxes on large cigars and an additional $11 million on excise taxes on little cigars, totaling nearly $570 million.

These revenue losses come with other challenges to governments. Bans, prohibitions, and exceedingly high tax rates fuel black markets and smuggling. The illicit cigarette market is a multibillion-dollar industry.

When Massachusetts banned the sale of menthol in cigarettes in 2020, illicit trade and cross-border shopping for cigarettes skyrocketed. Despite the ban, aggregate sales of cigarettes across the New England region showed no significant decline compared to other regions. Obviously, a nationwide ban would make cigarette smuggling and cross-border shopping more difficult, but the incentives for participation in the black market also grow.

Policymakers and regulators should not ignore the law of unintended consequences as they set tax rates and regulatory regimes for nicotine products. History is full of costly lessons from unforeseen reactions to prohibitions.

If the goal is to reduce smoking, high taxes and product bans are a costly and relatively ineffective means for reaching that goal. Consumers who still demand prohibited products may simply shift consumption to other (potentially more harmful) products, or they may find illegal means of acquiring what they want. The result is a narrowing a tax base, leaving fewer taxpayers to cover the costs of the externalities associated with smoking.

U.S. State Cigar Tax Rates in 2022 and projected One-Year Tax Revenue Declines from a Flavored Cigar Ban
  Tax Rate Percent of Sales that are Flavored    
State Little Cigars Large Cigars Little Cigars Large Cigars Reduction in Annual State Tax Collections Rank of Revenue Loss
Alabama $0.004 $0.04 38.9 42.1 $2,312,558 29
Alaska 75% of wholesale 75% of wholesale 42.3 42.3 $1,948,360 32
Arizona $0.021 $0.22 50 52.2 $14,021,174 5
Arkansas 68% of wholesale 68% of wholesale 41.1 26.6 $5,400,099 18
California 63.49% of wholesale 63.49% of wholesale 31.4 40.8 $29,626,816 1
Colorado 50% of wholesale 50% of wholesale 60 48.1 $7,436,442 11
Connecticut 50% of wholesale (not to exceed $0.50/cigar) 50% of wholesale (not to exceed $0.50/cigar) 23.4 46.6 $8,039,031 9
Delaware 30% of wholesale 30% of wholesale 32.8 50.6 $2,141,852 31
District of Columbia $0.251 91% of wholesale 19.9 19.9 $27,492 48
Florida no tax no tax 14.8 40.1 $0 51
Georgia $0.003 23% of wholesale 34.3 34.3 $3,454,900 25
Hawaii $0.16 50% of wholesale 0.07 0.07 $203 50
Idaho 40% of wholesale 40% of wholesale 56.3 32.4 $2,177,037 30
Illinois $0.149 / cigar 36% of wholesale 26 38.2 $2,482,928 28
Indiana 24% of wholesale 24% of wholesale 41.1 58.5 $13,877,148 6
Iowa $0.07 50% of wholesale (not to exceed $0.50/cigar) 34.2 44 $5,302,069 20
Kansas 10% of wholesale 10% of wholesale 40.1 40.9 $1,182,904 38
Kentucky 15% of wholesale 15% of wholesale 37.7 40 $6,045,644 13
Louisiana 8% of wholesale 20% of wholesale 29.4 42.8 $6,747,200 12
Maine 43% of wholesale 43% of wholesale 10.5 63.2 $7,645,778 10
Maryland 70% of wholesale 15% of wholesale 30.9 33.1 $1,056,515 41
Massachusetts 40% of wholesale 40% of wholesale 0.1 46.5 $5,749,249 15
Michigan 32% of wholesale 32% of wholesale (not to exceed $0.50/cigar) 23.8 46.9 $27,607,037 2
Minnesota $0.152 95% of wholesale (not to exceed $0.50/cigar) 30.6 38.7 $1,913,550 33
Mississippi 15% of wholesale 15% of wholesale 33.7 37.7 $1,341,715 37
Missouri 10% of wholesale 10% of wholesale 44.3 49.7 $3,688,780 24
Montana 50% of wholesale 50% of wholesale 48.3 46.9 $1,165,264 39
Nebraska 20% of wholesale 20% of wholesale 40.9 49.2 $142,265 47
Nevada 30% of wholesale 30% of wholesale 36.7 50.3 $3,302,833 27
New Hampshire $0.089 no tax 24.1 47.4 $23,878 49
New Jersey 30% of wholesale 30% of wholesale 17.8 48.7 $10,329,639 7
New Mexico $0.100 25% of wholesale (not to exceed $0.50/cigar) 48 52.7 $1,028,345 42
New York $0.218 75% of wholesale 56.3 44.9 $5,727,692 16
North Carolina 12.8% of wholesale 12.8% of wholesale (not to exceed $0.30/cigar) 41.5 39.9 $5,751,932 14
North Dakota 28% of wholesale 28% of wholesale 44 42.7 $523,842 44
Ohio 37% of wholesale 17% of wholesale (not to exceed $0.58/cigar) 33.8 55.7 $16,401,846 4
Oklahoma $0.102 $0.12 43.8 53.2 $4,199,370 21
Oregon $0.167 65% of wholesale (not to exceed $1.00/cigar) 39.1 37.8 $5,699,882 17
Pennsylvania $0.130 no tax 42.1 47.7 $938,298 43
Rhode Island $0.213 80% of wholesale (not to exceed $0.50/cigar) 20.2 51.7 $160,876 46
South Carolina 5% of wholesale 5% of wholesale 37.2 54.2 $1,352,636 35
South Dakota 35% of wholesale 35% of wholesale 35 43.2 $1,519,861 34
Tennessee $0.031 6.6% of wholesale 40.7 52 $1,348,485 36
Texas $0.001 $0.01 27.9 30.9 $3,427,323 26
Utah $0.085 86% of wholesale 78.9 60.2 $3,998,979 22
Vermont $0.154 92% of wholesale or $2.00 – $4.00 / cigar 23 51.9 $1,058,890 40
Virginia 20% of wholesale 20% of wholesale 39.9 42.3 $5,354,201 19
Washington $0.151 95% of wholesale (not to exceed $0.65/cigar) 33.5 50.5 $10,021,525 8
West Virginia 12% of wholesale 12% of wholesale 49.1 55 $3,782,685 23
Wisconsin 71% of wholesale (not to exceed $0.50/cigar) 71% of wholesale (not to exceed $0.50/cigar) 40.1 49.3 $17,399,478 3
Wyoming 20% of wholesale 20% of wholesale 52.9 46.2 $469,624 45
Total All States     33.3 47.8 $266,356,134  
Sources: United States Department of Treasury, “The Tax Burden on Tobacco,” 2022; states’ departments of revenue; Kuiper et al (2018) and Wang et al (2022), which both aggregate Nielsen sales product scanner data; the Cigar Association of America; and author calculations.

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