Congress Should Reverse a Corrupt Trade Policy that Disadvantages U.S. Companies and Favors Foreign Competitors

The U.S. has historically used excise tax drawbacks in its trade policy, which aren’t controversial. Excise tax drawbacks allow a company to claim a tax refund for excise taxes they have paid on goods if they export them.

However, in 2004, Congress passed the Miscellaneous Trade and Technical Corrections Act. This legislation accidentally created a highly controversial “double drawback” provision, allowing companies to claim a refund on excise taxes paid on exports—even though they never paid the excise tax. This policy has caused significant revenue loss for the government and is nothing more than an exploited, unfair loophole that creates tax advantages for U.S. foreign competitors. Originally only used by wine companies, a court ruling in 2021 made clear that the loophole is applicable to all excised products, with the largest problem product being tobacco, particularly cigarettes.

One of the lesser-understood and under-reported provisions in the House-passed One Big Beautiful Bill Act (OBBB) is a provision that would close this recently-opened loophole, which allows foreign tobacco companies to profit at the expense of U.S. taxpayers and U.S. companies through a “double drawback” on cigarette excise taxes.

Currently, this loophole enables foreign tobacco manufacturers to claim essentially a refundable tax credit, meaning they are refunded a tax credit they never actually paid. Foreign tobacco companies are being encouraged to steal from U.S. taxpayers, costing the federal government $12.1 billion over 10 years. On top of that, U.S. companies that employ Americans, pay their fair share of American taxes, and sell products to Americans are competing at a massive disadvantage because the U.S government is providing a foreign corporate subsidy to their competitors.

Both Democrats and Republicans have made efforts to close this loophole, as it is unfair to American companies and it creates perverse incentives by benefiting foreign tobacco companies manufacturing overseas at the expense of domestic producers. The tobacco manufacturing industry in the U.S. employs thousands of Americans, supporting numerous jobs across production, distribution, and retail stores.

Fortunately, there is a solution to this asinine policy. The provision in the OBBB clearly states that removing the ability to do “double drawback” is not a repeal of all drawbacks for tobacco. The bill states that, “the amount of drawback granted under such Code, or the Tariff Act of 1930, on the export or destruction of substituted merchandise may not exceed the amount of taxes paid (and not returned by refund, credit, or drawback) on the substituted merchandise.” This will level the playing field for American companies and enable duty drawbacks to be used as intended.

As the OBBB moves through the Senate, members should support closing this loophole and retain the provision. Not only would it save taxpayers $12.1 billion, but also would terminate the practice of providing cash subsidies to foreign tobacco companies that puts U.S. companies at a disadvantage.