Over 500 million premium cigars were sold in the United States in 2023. With each sale comes a complex taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
landscape.
All large cigars are subject to a federal tax of 52.75 percent, capped at $0.4026 per cigar. Large cigars and premium cigars are also subject to state-level excise taxes of varying rates and structures. Premium cigars are a subset of large cigars that are handmade entirely from tobacco. Several states levy a different tax on premium cigars than other large cigars or have a specific cap on the tax levied on premium cigars. Tax treatment of the various types of cigars varies significantly across states and across product types.
Taxes are levied on tobacco products both to discourage consumption of tobacco products and to generate revenues to address public health effects associated with their use. Large cigars, especially premium cigars, tend to be used in a different social context than cigarettes and for different reasons. Dangers associated with cigars depend primarily on the level of exposure—in cigars per day and inhalation level. Frequent cigar smokers may experience worse health effects than cigarette smokers, but casual cigar users may experience significantly lower risk of negative health effects.
Some states levy an ad quantum tax per cigar and other states levy percentage ad valorem taxes on wholesale or retail prices. To make the rates comparable across states, we calculated the tax that would be charged on a cigar that retails for $11.79 and is sold wholesale for $5.90.
Utah levies the highest tax of 86 percent, followed by New York and Colorado at 75 percent and 56 percent, respectively. Florida, Pennsylvania, and New Hampshire have exempted premium cigars from an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections.
entirely, with the next lowest taxes levied by Texas and Alabama at $0.01 and $0.04 per cigar. States with high-rate, uncapped ad valorem taxes tend to levy significantly higher taxes, especially on premium cigars which tend to be more expensive than standard large cigars.
Maryland and New Hampshire levy significantly lower taxes on premium cigars than other large cigars. Minnesota, Montana, Nevada, and Ohio only cap the tax levied on premium cigars, leaving the tax on other large cigars uncapped. Nevada has also established a floor for the per cigar tax at $0.30.
Seventeen states capped the tax levied on each premium cigar. Most states cap the excise tax at $0.50 per cigar. Other states set the cap as high as $4 per cigar in Vermont or as low as $0.30 per cigar in North Carolina.
Capping the ad valorem tax on each cigar helps prevent the revenue volatility that excise taxes tend to generate, as fluctuations in market prices will have less influence on revenues collected. Price-based taxes do not directly target the actual harm-causing elements of the products, but placing a cap on the tax means that most cigars, above a certain value, will effectively experience a specific tax per cigar of the capped rate.
Taxes levied on cigars with low prices are price-based, keeping them low to reflect the low prices. Conversely, taxes on cigars with high prices are capped to a specific tax per cigar, more directly targeting the harm-causing element of tobacco in each cigar. Higher-priced tobacco leaves and more finely crafted cigars do not have significantly greater negative externalities, so significantly higher taxes from a price-based tax would be excessive. This helps avoid imposing an undue burden on both particularly low-priced and especially high-priced cigars.
Premium cigar sales experienced a significant increase in 2021 and have continued to grow since. As more people consume this type of tobacco product, the impact that these taxes have on the public grows—as does the revenue potential. Structuring premium cigar taxes to effectively generate necessary revenues to address the public health effects of tobacco smoking, without imposing an excessive burden on consumers or producers, is an increasingly important consideration as this sector of the tobacco market continues to grow.
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