Small: Congress should end tax loophole for foreign businesses

Congress should end tax loophole for foreign businesses

By Jonathan Small

The “double drawback” loophole is a technical policy within federal trade law that is not widely known, yet it has a surprising connection to Oklahoma. The repeal of this loophole was included in the version of the One Big, Beautiful Bill that passed the House, but is missing from the Senate version of the bill.

That needs to change.

Here’s how the loophole works.

First, a company imports foreign-made cigarettes and pays a $1.01 per pack excise tax when they enter the U.S. market (so far, so good). Second, the same company manufactures another batch of cigarettes in the U.S. and exports them via a bonded warehouse, which allows for exportation without paying an excise tax (still fine, as excise taxes should only be paid on domestically consumed products). But then, finally, the double drawback loophole allows companies to claim a $1.01 excise tax “refund” on their exported merchandise, even though those exports never paid an excise tax.

In effect, this means the company gets back the excise tax they paid on the initial imported products that are being consumed in the U.S., giving these multinational companies a huge competitive advantage over U.S.-based domestic firms.

The Joint Committee on Taxation estimates that closing the loophole would save the Treasury $12.1 billion in revenue over 10 years.

If left in place, the loophole will remain a significant cost differentiator, and one with the power to upend and distort the market: exactly what tax policy should never do.

Xcaliber LLC, based in Pryor, is a prime example of a company that suffers under the current policy. Unlike foreign tobacco companies, Xcaliber does not have overseas manufacturing operations and cannot take advantage of the double drawback loophole. This puts them at a competitive disadvantage, as foreign companies can effectively sell their products at lower costs by avoiding excise taxes. If this loophole is allowed to persist, companies like Xcaliber could be completely overtaken, threatening jobs and wages in Oklahoma.

Obviously, many people don’t favor tobacco consumption, but so long as it is a legal product sold in national markets, the least we can do is have a level playing field for all market players. Tax policy should not favor foreign companies over domestic producers. That doesn’t reduce smoking; it reduces sales by U.S. companies and bolsters sales by foreign competitors.

The repeal of double drawback is not just about increasing revenue—it’s about restoring neutrality to America’s tax and trade policy. It is also completely consistent with free-market principles—if you are going to levy taxes like excise taxes, they should be evenly applied to all firms, not arbitrarily lower on foreign importers.

Jonathan Small serves as president of the Oklahoma Council of Public Affairs.