As a former economist for both the U.S. Treasury’s Office of Tax Analysis and the Senate Finance Committee, I have seen plenty of inane tax policy, but the fact that the U.S. government mails checks to multinational tobacco companies to refund taxes they never paid takes the cake.
This perverse loophole is the result of savvy foreign-based producers exploiting a poorly-written trade law and the bonded warehouse system to fleece the Treasury out of what will soon be billions of dollars.
Here is how it works: Trade policy has long allowed companies that import a product and then later export it to get back any tariffs or excise taxes they paid on the product when it entered the U.S. marketplace. The refunds are called “drawbacks.”
However, after a 2004 expansion of the law and a favorable court ruling in 2021, multinational tobacco companies started to abuse this system. First, they import cigarettes into the U.S. for consumption, paying a $1.01 per pack excise tax. Then, they manufacture an equal amount of cigarettes in the U.S., which they export through a bonded warehouse, which allows excise tax-free exportation.