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With their focus on issues like the Recovery Act, healthcare reform, and extended unemployment benefits, Republicans and Tea Partiers have made it easy for Democrats to claim that their advocacy of small government is a ruse for protecting the interests of the wealthy. Conservatives have said almost nothing about the President’s tobacco tax increase, which hits the poor hardest and raises revenue in a highly inefficient manner.
During his first month in office, President Obama violated his pledge not to raise taxes on families making less than $250,000 a year by approving a major increase in the federal excise tax on tobacco. This included a 159 percent increase—from 39 cents to $1.01—in the tax per pack of cigarettes. The Office of Management and budget reports that tobacco tax receipts are up $5.2 billion, or 68 percent, from $7.6 billion in fiscal year 2008 to $12.8 billion in fiscal year 2009.
While higher cigarette taxes discourage smoking, they are highly regressive. The Washington-based Tax Foundation has noted that “no other tax hurts the poor more than the cigarette tax,” pointing out in 2007 that the burden of this tax hike would be 37 times heavier on the lowest-earning 20 percent of households than would be an income tax increase that raised the same amount of revenue. At a time when the poor are already under severe economic stress, this amounts to a 25 percent reduction in the Earned Income Tax Credit, assuming the poorest citizens share the new tax burden equally. But they don’t—smokers and those involved in the tobacco industry shoulder the entire cost.
Even more disturbing is the way the revenues are being spent. The tax increase funds an expansion of the Children’s Health Insurance Program (CHIP)—which provides matching grants to states to subsidize health insurance for children—that extends benefits to households earning up to 300 percent of the federal poverty level, and even higher income levels in New York and New Jersey. As the Tax Foundation observed in its 2007 analysis, 49 percent of the population is within 300 percent of the poverty line, meaning a tax that falls heaviest on a fraction of the poor is financing a health insurance subsidy for middle class children.
This is not to say there should be no tobacco tax. The standard argument for imposing taxes on cigarettes is that smoking generates an externality, meaning it imposes costs on society. For example, second-hand cigarette smoke may pollute the lungs of nonsmokers, and tobacco use can lead to health problems whose medical costs are often borne by taxpayers. These societal costs, the argument goes, should be factored into the price of cigarettes.
The problem with the recent federal tax increase—as well as many exorbitant cigarette taxes at the state level—is that it is treated as a revenue generator instead of a corrective device. Rather than determining the size of the externality associated with tobacco use and then implementing a tax to compensate for it, policymakers merely instituted a tax that would pay for their new spending program irrespective of the societal costs of smoking. Incidentally, it’s convenient to cite these costs without quantifying them, since research suggests that earlier deaths caused by smoking provide savings for Social Security, Medicare, and other entitlement programs that benefit the aged.
Other proponents of the tax contend that tobacco imposes costs on both its users and the rest of society without providing any benefits, and that the government should therefore work to minimize or eliminate the use of tobacco. Leaving aside the dangerous implication that it is the government’s role to decide whether citizens derive legitimate benefits from their consumption of a product, the appropriate way to eliminate tobacco use would be by educating the public about its health risks, or by simply banning cigarettes.
Attempting to destroy the tobacco market through taxation is bound to have adverse fiscal consequences, especially if the revenue is earmarked for an entitlement. The decline in tobacco consumption would be accompanied by a drastic loss of revenue from the cigarette tax, making the CHIP expansion unsustainable. If the tax succeeds in persuading smokers to quit, in other words, Congress would have to cut CHIP funding, or raise some other tax.
The other problem is that such a massive tax increase might only destroy the legal market for tobacco, creating wide scope for a black market; whatever revenues accrue from the tax will be partially offset by the costs associated with enforcing compliance. Increased international cigarette smuggling in the wake of the tax increase was one motivation for the Prevent All Cigarette Trafficking Act passed earlier this year, which ramps up federal efforts to prevent tobacco tax evasion.
If the government wants to correct the externality associated with tobacco, it should quantify the externality and impose an appropriate tax. If it wants to eliminate tobacco, it should either convince the public not to use it, or prohibit it altogether. But it should not institute a “sin” tax as a revenue generator, and it certainly should not use the revenue from such a regressive tax to subsidize health insurance for ever-wealthier citizens. This sort of flawed policy is the inevitable result of government overreach; Republicans should point this out, and make its repeal a priority.
Peyton R. Miller ’12 is a government concentrator in Winthrop House. His column appears on alternate Wednesdays.
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