Federal Excise Tax Proposals • Estate Tax • LIFO
Federal Excise Tax on Tobacco and Nicotine Products
BACKGROUND: At the beginning of the 117th Congress, a handful of bills were introduced to increase the federal excise tax on tobacco and nicotine products. These bills have not moved individually, but a provision to levy a tax on nicotine was included in President Biden’s Build Back Better plan as an offset, or “pay for,” for the bill’s expanded social safety net programs.
Excise taxes are seen as discouraging certain behaviors, but they are also extremely regressive, taking a larger percentage of income from low-income earners than from high-income earners, and this point is antithetical to the Biden Administration’s populist approach to evening the score for lower income Americans through the tax system.
The often-used health argument for taxing of non-combustible nicotine products doesn’t hold up – all the innovative products - vapor products, heated tobacco, snus and nicotine pouches - are all thought to be considerably less harmful than cigarettes. Encouraging adult smokers to switch should not be discouraged or disincentivized.
STATUS: As the Build Back Better budget reconciliation package was negotiated at the end of 2021, the tax on nicotine was removed. The bill is not currently being considered and its fate is uncertain in the remainder of this Congress.
BACKGROUND: In 2001, Congress enacted legislation (PL 107-16) that made significant changes in the federal estate tax – or “death” tax – over the 2001 to 2009 period by gradually increasing the size of estates exempt from the tax and gradually reducing the tax rate applied.
Since that time, CDA has been supportive of various efforts in Congress aimed at making the repeal of the estate tax permanent. We believe that permanent repeal of the estate tax will ensure the vitality of America’s small businesses – the backbone of our nation’s economy.
The law reduces the corporate rate from 35 to 21% for tax years beginning after December 31, 2017.
STATUS: The law reduces taxes on pass through entities, seen as key drivers in job creation. The law provides for a 20% tax deduction on the first $315,000 of joint income earned by all businesses organized as S corporations, partnerships, LLCs and sole proprietorships. The law reduces their effective marginal tax rate to no more than 29.6%.
It allows businesses to immediately write off the full cost of new equipment to improve operations and enhance the skills of their workers - unleashing growth of jobs, productivity and paychecks.
The bill provides immediate relief from the Death Tax by doubling the amount of the current exemption (from $5.49 million per person to $10 million per person) to reduce uncertainty and costs for many family-owned businesses when they pass down their life's work to the next generation. The provision is in effect for tax years 2018-2025.
Background: The “Last In/First Out” method of accounting is used by many companies in the wholesaler and retail industry. Under LIFO, the cost of the most recent products purchased (“last in”) are the first to be expensed as cost of goods sold, which means the lower cost of older products will be reported as inventory. Over the course of many Congresses and many tax bills, there have been proposals to repeal this method of accounting. Repealing LIFO would increase tax revenues because the value of inventories held by businesses would be increased.
Status: Repeal of LIFO is not currently under discussion. CDA is an active member of a broad coalition of business organizations working to preserve LIFO accounting as an option for CDA members.