Trying to figure out why one little federal excise tax is not based solely on weight, volume, or potency (alcohol content), I’ve been stumped And I still am. It’s the tax on large cigars — 52.75% of sales price but not to exceed $402.60 per 1,000. The key advantage for expensive cigars is not the percentage base, but the 40-cent per unit cap — regardless of weight. Meanwhile, it turns out that makers of small cigars, taxed, like cigarettes, at $1.01 per pack of 20, have deliberately increased their size to cross over into the “large cigar” category – and pay only the ad valorem tax.
Why do we have this unique tax base? Asking around among tax people, I get these explanations for the ad valorem (percentage of price) tax base: “It appears that in 1868 the tax on cigars was not based on sale price . The concept of taxing large cigars at different rates based upon the sales price dates back to the Revenue Act of 1917. There is not much easily findable history to this except that it was intended to raise money for World War I.”
And “Sam Gibbons was a fierce defender of cigars.. Gibbons was on the Committee on Ways and Means for years, and while he may not have been the originator of the rate, but he was always there to preserve low rates when cigars came up. (Loved those “Tampas” named for the main city in his district.)
And “There currently remain big politics behind the taxation of cigars. The Cuban community in Florida being significant. Sam Gibbons of Tampa and W&M a long time protector/advocate for the Florida émigré cigar community.”
So I don’t know why the tax base for large cigars is different.