Doug Wheeler and Ian Parry
Most Americans have no doubt heard something about the battles brewing in Washington, D.C. as Congress works through the Senate and House versions of the recently-proposed One Big, Beautiful Bill (OBBB).
The implications of this debate are monumental.
Among the many differences, one key variance among the upper and lower chambers’ versions could impact the future of certain Florida industries due to discrepancies with a tax loophole known as the “double duty drawback.”
The House version of the OBBB, passed on May 22, seeks to close a loophole that has placed many of our domestic farmers and manufacturers at a competitive disadvantage while rewarding multinational, outsourcing corporations to the tune of billions of dollars.
The “double duty drawback” system is rooted in how the U.S. taxes certain goods—like alcohol and cigarettes—that can cause harm to people or society. These are called excise taxes, and they’ve been around for a long time. The idea is simple: if you’re selling something harmful in the U.S., you must pay an extra tax on it.
These policies are not new, as many excise taxes have been in effect for centuries around the globe, with amendments and reforms made over the years to equitably alleviate tax burdens under certain conditions.
But from early on, there has been a way to get some of that tax back. The Tariff Act of 1789 created a policy that allowed companies to get a drawback—or rebate—on excise taxes if they didn’t sell the taxed goods in the U.S. For example, if a company imported goods but then exported them or destroyed them instead of selling them here, they could get that tax refunded. Since the goods never reached U.S. consumers, the government didn’t collect the tax. The drawback system was thus a fair policy designed to encourage American competitiveness and the use of American seaports for trade routes.
But that same system began to break down with the passage of the Omnibus Tariff and Trade Act in 1984 that expanded the rebate rules. Now, companies did not have to export the exact same goods they imported. They could bring in one batch of a product and export a similar version—like a different batch made in the U.S.—and still get the tax refund. This opened the door to a major loophole.
Here’s how that plays out today: let’s say a global tobacco company brings foreign-made cigarettes into the U.S. These are taxed because they’re harmful. But instead of paying the tax, the company stores them in a special bonded warehouse where no tax is due—sometimes for up to five years. Meanwhile, they export the same number of U.S.-made cigarettes to another country. Because of the way the rules work, they can claim a full tax refund on the imported cigarettes—even though they never actually paid the tax in the first place. In the case of tobacco, this allows larger corporations to effectively pay none of the $1.01 per pack tax they would have originally paid.
This is what is commonly referred to as the “double drawback” loophole. It allows big corporations to recoup taxes they were never really charged, all while moving products through a legal loophole that was originally designed to make trade fairer—not to be exploited for completive advantage.
The double duty drawback loophole therefore violates the efficacy of the excise tax and a Joint Committee on Taxation estimates that closing the loophole would save the U. S. Treasury $12.1 billion in revenue over 10 years, with their estimate growing each year of the score.
Beyond this, the double drawback continues to place exclusively domestic tobacco companies at a significant competitive disadvantage in the American marketplace. The Dosal Tobacco Corporation, a Florida manufacturer of popular cigarettes like 305’s, Competidora, and DTC, will naturally face decreasing revenues as it fairly pays the excise tax and double drawback recipients can more easily undercut prices.
Ultimately, remedying the double duty drawback abuse will do more than protect Florida businesses and industries like Dosal. Both in Florida, and at the federal level, international companies aware of the U.S. tax exploit will naturally continue to utilize the strategy that allows them to increase profit margins by avoiding taxes. But this endangers the many American farmers that cultivate the resources for their respective industries and the American manufacturing workers that finalize the products.
Simply put, the absence of a fix to the double duty drawback loophole will be a direct subsidy given to outsourcers who will increasingly make the products sold in America less American. All of this would happen as American producers find themselves increasingly undercut and their employees out of work.
Consequently, as the Senate convenes to debate the One Big, Beautiful Bill, it should value the benefits of reinforcing the free-market principles upon which this country was founded. In its current form, the Senate version continues the loophole, thus removing the remedy language entirely. This lack of consensus will certainly impact competition and risk these industries’ future.
So, as the debate continues, one of the first things to be said should highlight concerns and consequences to come if the Senate fails to align with the House’s remedy.
Otherwise, Americans and Floridians alike will pay the price.
Doug Wheeler is the Director of the George Gibbs Center for Economic Prosperity at The James Madison Institute (JMI). Ian Parry is a Research Assistant at The James Madison Institute.
