WASHINGTON – A dozen tobacco companies have gained from a legal loophole that helped them avoid as much as $1.1 billion in U.S. taxes.
Their secret: Using fillers such as the clay found in cat litter or stuffing the products with more tobacco to tip the scales in their favor. The heavier weight lets the companies sidestep a 2,653 percent increase in a federal excise tax, taking advantage of a 2009 law that spared so-called big cigars.
There were 22 companies producing small cigars in the year before the law created the new tax structure, according to data from the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau. Twelve of those companies either switched to or increased production of large cigars in the year following the law, the bureau found.
It shows what length the tobacco companies will go to avoid taxes and regulation that were designed to improve public health without regard to their customers, said Danny McGoldrick, vice president of research at the Campaign for Tobacco Free Kids in Washington. They should equalize the tax to stop the shenanigans.
The practice has contributed to a doubling in sales of the weightier tobacco products and slowed a decade-long decline in tobacco use. The Centers for Disease Control and Prevention in an Aug. 2 report blamed sharp increases in adult consumption of pipe tobacco and cigarette-like cigars since 2008 on the 2009 law that created tax disparities between product types.
The Government Accountability Office estimated in an April report that market shifts from roll-your-own to pipe tobacco and from small to large cigars reduced federal revenue by a range of $615 million to $1.1 billion from April 2009 through September 2011.
Sen. Dick Durbin, D-Ill., introduced legislation Jan. 31 to close the loophole. The bill would equalize the tax structure so there wouldn’t be an incentive to manipulate products, generating $3.6 billion in new tax revenue over 10 years a spokeswoman said.
The loophole appears to have mainly benefited smaller tobacco companies. Reynolds American Inc., the second-biggest U.S. tobacco company, doesn’t operate in that market, a spokesman said.
Altria Group Inc., the largest seller of tobacco in the U.S., said its John Middleton Co. unit had already been selling large cigars with its Black & Mild line before the change in the law. The company didn’t have to make any shifts in how it formulates the cigars, which mostly are wood or plastic tipped and come as singles or in packs of two or five, a spokesman said.
Prime Time International Co., a closely held tobacco company, sells some of its large cigars and flavored cigars in 20-count packs, similar to regular cigarettes. Cheyenne International, based in Grover, N.C., also specializes in smaller-sized cigars that have a similar look and design of cigarettes.
Jack Wertheim, chairman of Phoenix-based Prime Time, said shifts into the large cigar market are about responding to customer demands. The company sells large and small cigars to satisfy customers who prioritize taste and quality and appease those who want a lower-priced product, he said.
Prime Time isn’t saving on taxes, and any savings would be passed to the customer, Wertheim said.
Current rules require a rolled tobacco product to weigh at least 3 pounds per 1,000 to be labeled as a large or premium cigar, a category where taxes increased just 155 percent.