Eliminating pennies will produce merchant windfall

The U.S. Department of the Treasury is expected to stop producing pennies in July 2026, in accordance with an executive order issued by President Trump in March 2025. Now a new report out of the Federal Reserve Bank of Richmond suggests the move will result in a "rounding tax" costing U.S. consumers over $6 million a year. If the government decides to cease producing nickels as well, the cost to consumers would balloon to almost $56 million annually, the report revealed.

The report, Rounding up: The Impact of Phasing Out the Penny, was written by Zhu Wang, vice president for research in financial and payment systems, and Russell Wong, a senior economist; both work in the research department at the Richmond Fed.

The report uses data from the 2023 Diary of Consumer Payment Choice, a Federal Reserve-sponsored survey that tracks real payments from a nationally representative sample of consumers. Participants were randomly assigned a three-day period between Sept. 29 and Nov. 2, 2023, during which they recorded every payment transaction they made.

In all, 24,728 transactions were reported by 4,671 adults. Of the transactions reported, 3,359 were paid using cash. Among cash transactions, 2,436 ended in whole dollars and thus would not be affected by transaction rounding. About 35 percent of cash transactions ended in 0 or 5 cents. Among transactions affected by rounding, the distribution is skewed, the researchers wrote.

However, there appears to be a tendency for transaction totals to end in 3, 4, 8 or 9 cents, suggesting that rounding may indeed result in a new cost to consumers. In those cases, totals would be rounded up to the nearest 5 or 10 cents.

Producing a penny costs more than 3 cents

The rationale for ceasing production of pennies is simple economics. According to the U.S. Mint, the Treasury Department agency that produces coins, producing and distributing a single penny costs 3.69 cents, nearly four times its value. The result was a seigniorage loss of $85.3 million last year from minting more than 3 billion new pennies.

"These mounting losses have sparked a re-evaluation of the penny's role in an increasingly digital economy," the report stated.

One important social benefit is the pricing flexibility the penny provides retailers. However, even if the cost of producing a penny exceeds its face value, one could argue that the social benefits it provides to the U.S. economy may outweigh its production costs, and that eliminating the penny could result in a loss of welfare, the researchers also noted.

#h2Loss of pennies could produce 'rounding tax' "An important social benefit is the pricing flexibility it enables," the researchers stated. "Without the penny, businesses would need to round cash transactions to the nearest 5 cents, potentially increasing the cost of a given consumption basket for U.S. consumers."

Rounding typically works as follows:

• Totals ending in 1¢ or 2¢ are rounded down to 0¢
• Totals ending in 3¢ or 4¢ are rounded up to 5¢
• Totals ending in 6¢ or 7¢ are rounded down to 5¢
• Totals ending in 8¢ or 9¢ are rounded up to 10¢

At first glance it may appear that rounding is neutral. But this assumes that the final digits of transaction totals are uniformly distributed, which is not the case. If transaction amounts are skewed toward values that round up, consumers will end up consistently paying more—creating a rounding tax, the authors wrote.

In phasing out the penny, the U.S. would join a growing list of countries that have already eliminated low-denomination coins. Canada, for example, ceased penny production in 2012; Australia phased out its 1-cent and 2-cent coins in 1992; New Zealand has eliminated 1-cent, 2-cent and 5-cent coins.

What about nickels?

"Ironically, eliminating the penny could increase demand for nickels, which are even more costly to produce.” In 2024, it cost 13.8 cents to mint a nickel, which resulted in a loss of $1.75 for every $1 in nickels issued by the government.

It's worth noting that there is no public discussion of getting rid of U.S. nickels, but if that were to happen, it would place a significantly larger burden on cash users.

The researchers' number crunching revealed that the rounding tax of eliminating both pennies and nickels would cost consumers a whopping $55.58 million a year.

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