A smart tax system tries to reward virtue and punish vice. That’s why we impose an excise on purchases of things such as cigarettes. We want to discourage people from smoking, and there’s a broad bipartisan consensus that reasonable tobacco taxes make sense to raise revenue and as a public health measure to discourage smoking.
At the same time, the reason we tax imports through excise tariffs is to incentivize Americans to purchase domestic products over foreign goods. But Congress and industry special interest groups have constructed a bizarro tax policy that blatantly violates both these principles. It’s a policy that rewards smoking, tilts the tax system in favor of foreign production, and costs the federal government billions of dollars of taxes owed. All at once!
Fixing this tax loophole would be a $12 billion revenue raiser to reduce the budget deficit or “pay for” other pro-growth tax cuts in the “big, beautiful” tax bill. The House bill closes the legal loophole. The Senate bill allows the scheme to continue.
Under this convoluted multi-billion-dollar tax provision, the U.S. government sends “refund” checks to foreign tobacco companies. These refunds are supposed to be offsets for excise taxes they pay when cigarettes are imported into the United States. But in many cases the rebates are for excise taxes that were never paid. So the $1.01 excise tax is applied to domestic cigarette sales, but not to foreign tobacco companies.
Many taxpayer advocacy groups have demanded that Congress end this quirky giveaway. As the analysts at Citizens Against Government Waste put it recently: “[T]obacco companies are moving their manufacturing overseas to avoid paying the initial excise tax on cigarettes.”
The sad irony is that this exactly the opposite of what President Donald Trump wants from our tax system. As one of the economists who helped write the 2017 tax law that is now being extended and improved in the One Big Beautiful Bill, I know Trump has always wanted to lower tax rates here are home to stop “corporate inversions,” which happen when American companies leave the U.S. to lower their tax bills. This tobacco policy encourages companies to leave. The famous Camel cigarette is now produced in Mexico in part because of this backward tax policy.
This loophole has become costly to the Treasury: The Joint Committee on Taxation estimates that ending this loophole for tobacco products alone would save $12.1 billion over the next decade, and a recent analysis by economists at Capitol Policy Analytics suggests that the true cost will likely be much higher.
This workaround from paying the cigarette excise tax is also dangerous to Americans’ health. While the government spends nearly $1 billion per year to discourage smoking, it is simultaneously cutting checks to foreign cigarette makers, which undermines Trump and Health and Human Services Secretary Robert F. Kennedy Jr.’s “Make America Healthy Again” agenda. Discouraging smoking is generally regarded as the easiest way to improve Americans’ health.
Closing this loophole would normally be a slam dunk with strong bipartisan support. But it has become a political football because R.J. Reynolds, which is based in North Carolina, asserts that farmers in the state benefit from the subsidy.
THE SENATE MUST ELIMINATE FOREIGN FRAUD AND ABUSE IN TRUMP’S ‘BIG, BEAUTIFUL BILL’
My congressional sources tell me that the only reason some in the Senate want to retain the giveaway is that Sen. Thom Tillis (R-NC) is in a potentially tight reelection campaign for 2026. In other words, a rotten policy that is bad for America’s physical and fiscal health is kept alive for one reason: politics.
Tillis is a fine senator and a friend of the taxpayer. But tobacco farming has shrunk to less than 2% of employment in the state, and that percentage continues to decline each year. North Carolina has sprung up as a manufacturing, banking, and tech powerhouse. Even voters in a state that was once known as “Tobacco Row” know a scam when they see one.
Stephen Moore is a former senior economic adviser to President Donald Trump. He is a co-founder of the Committee to Unleash Prosperity.