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 The GAO estimated $2.6 billion to $3.7 billion in lost revenue
from April 2009 to February 2014 as manufacturers exploited
loopholes in the Children's Health Insurance Program Reauthorization
Act which raised taxes for smoking-tobacco products.
"Each of the three tobacco manufacturers that agreed to speak with
us explained that their companies switched from selling higher-taxed
roll-your-own tobacco to lower-taxed pipe tobacco to stay
competitive," the congressional watchdog agency said in the report,
which was the focus of a Senate hearing on Tuesday.
At the hearing, Liggett Vector Brands LLC Chief Executive Ronald
Bernstein urged lawmakers to take action against abuses by
manufacturers.
He held up two seemingly identical, but differently labeled
non-Liggett bags of tobacco. Showing a third sample, he pointed out
that a label saying "all-natural pipe tobacco" covered up a
statement that the bag "makes approximately 500 cigarettes."
"Everyone knows this is cigarette tobacco," Bernstein said. "The
manufacturer knows. The consumer knows. And I know. I know because I
tried smoking it in a pipe and it was not a pleasant experience." Some manufacturers also add a few ounces of tobacco to small cigars
so they qualify as the larger product. Others even mix in clay or
kitty litter to increase the weight, Michael Tynan, policy officer
at the Oregon Public Health Division, told the hearing.
The GAO said the tobacco market shifted accordingly. Yearly sales of
pipe tobacco rose more than eight-fold from fiscal 2008 to 2013,
while sales of roll-your-own tobacco declined almost six-fold.
Over the same period, large cigar sales doubled, while small cigar
sales dropped to just 700 million from 5.7 billion.
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Senate Finance Committee Chairman Ron Wyden, who convened the
hearing, criticized the Treasury Department's Alcohol and Tobacco
Tax and Trade Bureau (TTB), which is responsible for collecting
tobacco taxes and cracking down on evasion, for "footdragging."
In recent years, the agency has pushed to apply "advanced
investigative techniques to uncover illicit trade and fraudulent
activity," including deploying about 125 auditors and investigators,
the TTB wrote in its Senate testimony.
Responding to a push to better differentiate between roll-your-own
and pipe tobacco, the agency published an "advanced notice of
proposed rule making" in 2010 and 2011. But no rule had yet been
issued, the GAO wrote.
In 2015, the TTB will issue a proposed regulation cracking down on
the illegal activities, TTB Administrator John Manfreda said on
Tuesday.
But Wyden, an Oregon Democrat, said it was not enough. He said the
problem reminded him of "the old marquee at the movie house that
says: 'Coming soon,' and it never gets there."
(Reporting by Annika McGinnis; Editing by Peter Cooney)
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