Tobacco Export Tax Modifications

Is This the End of Duty Drawbacks?

The One Big Beautiful Bill is, as we know, full of language that could bring big, maybe beautiful- maybe not so beautiful, changes to agriculture in the United States and our global trade relationships. In support of the mission to decrease the country’s trade deficit and increase revenue through more robust manufacturing sectors, tax loopholes are under scrutiny.  Duty drawbacks, which have been part of U.S. trade policy since George Washington signed them into effect in 1789, might soon be a thing of the past, and with them, the industries made up of America’s farming families that rely on these tax rebates to remain competitive in international arenas.

Since the birth of the nation, many fiscal policy mechanisms have been used to support the exporting of American goods into global markets. Tariffs are just one mechanism. Duty drawbacks are another. The question is, can both exist efficiently together and generate revenue without adding to trade deficits? The increased tariff strategy is, in part, meant to boost revenue inside the United States.  Duty drawbacks essentially take the money collected through tariffs and refund it back to the companies who paid them. 

The Benefits of Duty Drawbacks

From appliances, to textiles, to pharmaceuticals, most U.S. industries take advantage of duty drawbacks so that they can continue to import the various components they need to export finished products across the world.  For some, the elimination of duty drawbacks means they will source components from domestic producers rather than international suppliers because it’s no longer financially advantageous to purchase cheaper imports. As we’ve already seen, companies may opt to invest in domestic manufacturing of necessary components or even relocate. 

Cars, medications, clothing lines, cosmetics and appliances typically have dual markets. They sell domestically and internationally. But for other sectors, like tobacco, eliminating duty drawbacks could have a ripple effect that jeopardizes the entire industry. Tobacco isn’t a growing industry in the United States. It relies heavily on foreign market demand and the fact that duty drawbacks virtually eliminate the cost of importing inputs like filters, paper and tobacco additives.

Companies like R.J. Reynolds Tobacco spend a lot of money to get inputs into the U.S. but those inputs are never put into tobacco products sold to Americans. Duty drawbacks keep those exports going out and don’t penalize the company for selling to global markets.  Plus, the tax elimination keeps American tobacco competitive since it is up against products made using cheaper labor, cheaper inputs.  Financially, American tobacco maintains its place as a premium product and production stays lucrative.

Can Tobacco Stay Competitive Without Duty Drawbacks?

Without the duty drawback policy, staying competitive will be challenging. China, India and Brazil lead the way in tobacco production. With virtually no market expansion available inside the United States the tobacco industry could dry up. Who will demand higher priced American tobacco, as much as 20% higher,  when cheaper options are available? As demand diminishes so too could tobacco farming. States like North Caroline and Virginia who have built agricultural economies on the industry will feel the impact. Estimates suggest that North Carolina generates $550 million in revenue for the state every year. If the Big Beautiful Bill does away with duty drawbacks farmers could lose $100 million a year with the demand decrease and the ripple effect of any tariffs absorbed by the tobacco manufacturing companies. 

Some 200,000 jobs are created from the tobacco industry including farmers but also factory and manufacturing jobs. These are jobs that pay as much as $84,000 a year. North Carolina fears the industry will further consolidate, possibly into Virginia. Of the 1000 farms producing tobacco in the State, most are also rotating in other commodities. By removing tobacco as an income producing crop it could also eliminate a farmer’s cash flow to continue farming other crops. Agriculture could be forever changed in North Carolina.

Do Duty Drawbacks Undercut Tariffs?

In general, eliminating duty drawbacks entirely could save the federal government $12 billion dollars, with tobacco representing just a sliver of this number, and lift some of the tax burden of Americans. The initial intent of duty drawbacks was to build robust trade relationships and incentivize American business to expand into global markets. Have we expanded too far? Is the current trade deficit a sign that things are out of whack? 

If promoting exports is no longer the primary goal then perhaps duty drawbacks have lost their value. Tariffs as a stand alone mechanism certainly favor the businesses that conduct the majority or all of their operations inside the U.S. before exporting goods internationally. One seems to undercut the other,.  Even if duty drawbacks keep money in the hands of American businesses, they don’t unburden Americans from taxes and they don’t support narrowing the deficit gap. Industries like tobacco could get caught in the crossfire of these policy decisions.