Publisher's Synopsis
Section 703 of the Children's Health Insurance Program Reauthorization Act of 2009 (CHIPRA) directed the Secretary of the Treasury to conduct a study concerning the magnitude of illicit tobacco trade in the United States and to submit to Congress recommendations for the most effective steps that the Department of the Treasury can take to reduce such illicit tobacco trade. The Secretary was directed to include a review of the loss of Federal tax receipts due to the illicit tobacco trade in the United States and the role of imported tobacco products in the illicit trade in the United States. Accurately measuring the amount of federal tax receipts lost as a result of tobacco diversion and smuggling is difficult because these activities are, by definition, clandestine in nature. As such, any estimate of the extent of the illicit tobacco trade will have a wide window of uncertainty around it. The method employed for preparing this report involved comparing the amount of taxes collected by Treasury to the taxes that would have been collected if all consumed cigarettes-measured using nationally representative surveys-were taxed in the years leading up to the passage of CHIPRA. At the time of comparison, time series data on consumption and taxed sales were not available for time periods after the tax increase brought about by the enactment of CHIPRA. On April 1, 2009, the federal excise tax on cigarettes was increased more than 150 percent, creating a greater incentive to evade federal taxes. An analysis of the effect of this tax increase on cigarette consumption, taxed sales, and smuggling could therefore not be undertaken. Further, the use of survey data poses an additional set of issues. Survey experts agree that survey respondents understate the true extent of their cigarette consumption. If taken as true, the responses in the surveys we examined, would suggest that, on average, only 70 percent of purchased cigarettes were reported to be actually consumed, which strains credulity. The substantial uncertainty surrounding the degree of underreporting of cigarette consumption in survey data necessarily generates large uncertainty about the magnitude of the federal tax receipts lost due to the illicit cigarette trade. Any estimate of federal tax loss based on survey data therefore should be regarded as only broadly indicative of actual receipts lost.
