More than 230 years ago, one of the first acts of the First Congress in 1789 included a relatively mundane, but important, tax policy allowing a refund on excise taxes. Unfortunately, this has become a corporate subsidy for the tobacco and alcohol industries.
This, seemingly trivial, provision refunded excise taxes on imports that are later exported. This makes the U.S. a desirable intermediary port for international supply chains, as there is no penalty for shipping through American ports. It is common practice in many countries and is usually entirely uncontroversial, unless something has gone wrong. In the U.S. something has gone wrong with it, as it was modernized, a loophole was introduced.
The loophole resulted from two changes. First, in 1984 the refund, also known as a “drawback,” was expanded to allow companies to export a domestically produced substitute of the imported good, rather than the specific item they had brought in.
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Justin Leventhal is a senior policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, follow us on X @ConsumerPal.