When Congress taxes a product that can never reach American consumers, it violates a basic principle of sound tax policy: tax neutrality. Yet that’s exactly what would happen if lawmakers follow through on a misguided proposal in the US House’s “Big Beautiful” reconciliation bill to remove tobacco from the federal duty drawback program.
A duty drawback is a refund the federal government gives manufacturers when they export or destroy products taxed initially in the United States. The idea dates to the first trade law passed by Congress — the Tariff Act of 1789, signed by President George Washington, which created the drawback system to encourage exports. The principle is simple: if a taxed product is never sold domestically, the taxes are refunded. That way, businesses aren’t punished for reaching foreign markets or discarding unsold inventory. It’s a longstanding safeguard against double taxation and trade distortion.
Tobacco duty drawbacks are not loopholes — they are safeguards. Eliminating them would break with over two centuries of trade policy promoting American exports and domestic manufacturing.
Buried in the more than 1,100 pages of the “One Big Beautiful Bill Act” (HR 1), recently passed by the US House, is Section 112032, which strips tobacco of its eligibility under the drawback program. Since 1789, this program has refunded import duties on goods, or goods made from components, that are later exported. For US tobacco manufacturers, that means a refund on imported cigarette paper, filters, and other inputs if the finished products are sold overseas. Removing tobacco from the program amounts to a targeted tax increase on one of America’s most export-dependent farm sectors — penalizing North Carolina flue-cured tobacco growers simply for accessing global markets.
Fortunately, North Carolina’s own Tobacco Associates, Inc., has recognized the threat. Its board recently voted to oppose the provision, rightly noting that drawback refunds are essential to staying competitive in a global marketplace increasingly shaped by trade barriers and shifting demand.
North Carolina’s Export Economy at Risk
They are right to be concerned. A 2024 study by the John Locke Foundation found tobacco remains one of North Carolina’s most economically significant industries. The state grows more than 80% of the nation’s flue-cured tobacco. Nearly 200,000 jobs — direct and indirect — are linked to the industry. Manufacturers contribute over $30 billion annually to state GDP, while the supply chain generates more than $845 million in tax revenue.
For North Carolina, which is home to over 800 tobacco farms and the headquarters of three major US cigarette manufacturers, this policy change would be a direct blow. It penalizes international trade and a regional economy built on agriculture, logistics, and skilled manufacturing. From farmworkers in Nash County to factory employees in the Triad, the cost of this policy would be paid across rural and industrial communities alike.
Duty drawbacks support this economic engine by ensuring North Carolina producers aren’t taxed on products that never reach US consumers. Ending the program would hurt exporters, especially smaller manufacturers and growers who rely on global sales to stay afloat. It would accelerate industry consolidation, reduce competition, and shrink opportunity in a legal, regulated, and historically important sector.
This isn’t just an issue for North Carolina — it’s a broader matter of sound trade policy. But the stakes are especially high here. In Wilson, Johnston, and Nash counties alone — North Carolina’s leading tobacco-growing regions — the loss of export incentives could shrink farm revenues by millions. Local economies that depend on tobacco-related activity for jobs and tax revenue would face a ripple effect, from trucking firms to small-town retail.
Preserving the duty drawback for tobacco is fully consistent with free-trade principles. Free trade is not about picking winners and losers but ensuring that markets operate without artificial penalties or government distortions. The drawback program doesn’t subsidize exports or provide special favors; it simply removes the unintended consequence of double taxation when imported components are used in products that never reach US consumers.
Eliminating that refund for a single, disfavored industry undermines the neutrality of the tax code and injects protectionist logic into what should be a rules-based, open system. Supporting the drawback is not a defense of tobacco — it’s a defense of economic fairness and market integrity.
Some might argue: tobacco is harmful, so why care if it’s taxed extra? But that misses the point. This isn’t about public health. The drawback applies only to exported or destroyed tobacco products never smoked in the United States. Maintaining the program doesn’t encourage consumption. It simply ensures the tax code stays fair, consistent, and neutral.
A Precedent Congress Shouldn’t Set
If Washington is serious about helping rural America and reviving export-driven industries, it should reject this provision and preserve the integrity of the drawback system. This is more than a tobacco policy — it tests whether Congress still trusts free markets or prefers to pick winners and losers through red tape and punitive taxation.
Editor’s Note (May 2025): Since publication, policy experts and stakeholders have clarified that the language in HR 1 does not fully repeal the federal duty drawback program for tobacco. Rather, it limits the use of “substitution drawback” to cases where federal excise tax was actually paid. While the legal mechanism remains intact for taxed goods, this change significantly reduces refund eligibility for certain export pathways — particularly those used by North Carolina-linked manufacturers and growers. The author stands by the broader concerns raised in the article regarding tax neutrality and the economic impact on North Carolina’s tobacco sector.