Fiscal and Policy Implications of Selling Pipe Tobacco for Roll-Your-Own Cigarettes in the United States

Abstract

BackgroundThe Federal excise tax was increased for tobacco products on April 1, 2009. While excise tax rates prior to the increase were the same for roll-your-own (RYO) and pipe tobacco, the tax on pipe tobacco was $21.95 per pound less than the tax on RYO tobacco after the increase. Subsequently, tobacco manufacturers began labeling loose tobacco as pipe tobacco and marketing these products to RYO consumers at a lower price. Retailers refer to these products as “dual purpose" or “dual use" pipe tobacco.MethodsData on tobacco tax collections comes from the Alcohol and Tobacco Tax and Trade Bureau. Joinpoint software was used to identify changes in sales trends. Estimates were generated for the amount of pipe tobacco sold for RYO use and for Federal and state tax revenue lost through August 2011.ResultsApproximately 45 million pounds of pipe tobacco has been sold for RYO use from April 2009 to August 2011, lowering state and Federal revenue by over $1.3 billion.ConclusionsMarketing pipe tobacco as “dual purpose" and selling it for RYO use provides an opportunity to avoid paying higher cigarette prices. This blunts the public health impact excise tax increases would otherwise have on reducing tobacco use through higher prices. Selling pipe tobacco for RYO use decreases state and Federal revenue and also avoids regulations on flavored tobacco, banned descriptors, prohibitions on shipping, and reporting requirements.

Cigarette Price-Minimization Strategies by U.S. Smokers

“…Other studies have discussed the impact of the federal tax disparity between roll-your-own and pipe tobacco and the impact of state tax avoidance. 5,6,20,21 Also, the NATS questions on price-minimization strategies are based on different time frames. As a result of the above two data limitations, the prevalence of price-minimization strategies may be underestimated.…”

“…Other studies have documented smokers seeking less-expensive cigarettes in reaction to a price increase. 6,8,10,21,22 For example, in reaction to the 2009 federal excise tax increase, Internet searches for low-priced cigarettes increased. 22 Cigarette price-minimization strategies are practiced widely, and resulting cost reductions are quite large.…”

Trends in annual sales and current use of cigarettes, cigars, roll-your-own tobacco, pipes, and smokeless tobacco among US adults, 2002–2012

“…The tobacco industry responded to this multitiered federal tobacco tax policy by relabeling or changing the formulation of certain products 10. For example, RYO tobacco was packaged and labelled as pipe tobacco to avoid stricter tax policies and regulation, while small cigars were reformulated and reclassified as large cigars 10 11. These evasive marketing practices by tobacco manufacturers were possible because for practical purposes the products are taxed and regulated according to the label on the packaging 11 12.…”

Trends and socioeconomic differences in roll-your-own tobacco use: findings from the ITC Europe Surveys

“…However, the tax disparities on different types of tobacco products offer an opportunity for smokers to seek lower priced tobacco products such as Roll-Your-Own (RYO) cigarettes 4 5. At present, all member states of the European Union tax RYO tobacco at a lower rate than factory-made (FM) cigarettes 6 7.…”