This act establishes a lower federal tax rate specifically for tobacco products defined as waterpipe tobacco, such as hookah and shisha.
Darrell Issa
Representative
CA-48
The Hookah Clarification Act of 2025 establishes a distinct federal tax classification for waterpipe tobacco, commonly known as hookah or shisha. This legislation sets a significantly lower tax rate of $0.5662 per pound specifically for waterpipe tobacco, while maintaining the current rate for other types of pipe tobacco. The Act also provides a clear definition for what constitutes "waterpipe tobacco" for tax purposes.
Hookah Tax Loophole: New Bill Drops Federal Tax Rate on Waterpipe Tobacco by 80%
The newly introduced Hookah Clarification Act of 2025 is short, but it packs a significant punch for anyone involved in the tobacco industry—and for federal tax revenue. This bill doesn’t ban anything or create new safety rules; instead, it creates a massive tax break for one specific type of tobacco product: waterpipe tobacco.
The $2.26 Difference
Right now, most pipe tobacco is taxed at a federal rate of $2.8311 per pound. This bill carves out a brand-new category called "waterpipe tobacco," which includes common products like hookah, shisha, maassel, narghile, and argileh. For this newly defined category, the federal excise tax rate drops dramatically to just $0.5662 per pound (SEC. 2).
To put that into perspective, the difference is $2.26 per pound. This means that waterpipe tobacco will be taxed at less than 20% of the rate applied to traditional pipe tobacco. This isn't a minor adjustment; it’s an 80% tax cut for one segment of the market, effective immediately upon the law’s enactment for all manufactured or imported product.
Who Pays, Who Saves
For consumers who frequent hookah lounges or buy shisha for home use, this could translate into lower prices, assuming importers and manufacturers pass the savings along. The biggest winners here are clearly the companies that import and produce waterpipe tobacco, as their federal excise tax liability plummets. This gives them a huge competitive edge over producers of traditional pipe tobacco, who are still stuck paying the higher rate.
However, this tax subsidy comes at a direct cost to the federal government. Excise taxes on tobacco products bring in billions of dollars annually, which are often earmarked for public health programs. By creating a massive tax disparity that favors one product over another, the government is essentially choosing to collect significantly less revenue from this growing segment of the tobacco market. This shift could also incentivize manufacturers to try and reclassify other tobacco products under the lower-taxed "waterpipe" definition, potentially expanding the loophole further down the line.