Inversions have been in the news consistently this summer as multiple companies have looked for legal paths away from the U.S. corporate tax system. Burger King became the latest corporation to add to the list after they...
- Cigarette Taxes Choke the Poor
Cigarette Taxes Choke the Poor
This commentary was published in The Hill on July 17, 2007.
Today the Senate Finance Committee marks up a bill that would increase the federal cigarette tax by 156 percent in order to raise $35 billion for the popular State Children's Health Insurance Program (SCHIP).
The tax increase's supporters contend that its time has come, noting that it has been five years since the last increase.
This is a somewhat disingenuous argument, to say the least, considering how rapidly state cigarette taxes have risen during those five years. Thirty-six states have increased cigarette taxes since 2002—and some more than once. The trend is not slowing: five states have already increased their tax in 2007.
Since 2002, the average state tax per pack of cigarettes has increased from 67 cents to $1.03. Added to the federal rate, that's a 34 percent increase in total taxes per pack, more than double the rate of inflation, impeaching any argument that cigarette taxes have somehow lost their bite in recent years.
State lawmakers have often used a legislative trick to enact steep tax hikes on tobacco: linking a cigarette tax hike to a popular spending program. Usually the spending program has nothing to do with smoking. This is exactly what is happening at the federal level now with SCHIP.
Unfortunately, this proposal is far from sound tax or fiscal policy. A politically popular, expensive program should never be funded by a small, low-income minority like cigarette smokers, even though smokers are politically unpopular.
Especially when one considers this: no other federal tax hurts the poor more than the cigarette tax.
Not only are cigarette-tax payers poorer as a group than the payers of other taxes, but there are also fewer of them. In fact, the burden of the proposed cigarette tax hike on the lowest-earning 20 percent of households is 37 times heavier than it would be if the government raised the money with the federal income tax.
Put another way, the proposed cigarette tax hike would hit the poor with the same force as cutting the Earned Income Tax Credit by 25 percent. That's the type of impact that should make every policymaker think twice.
Powerful special interest groups pushing "public health" have been able to bring the non-smoking majority along with their campaign to tax smokers. James Madison would call this a tyranny of the majority: Politicians have identified an unpopular minority and forced punitive taxes on them.
Advocates of higher taxes on tobacco, despite their impact on the poor, are frequently accused of being modern-day temperance workers who busy themselves telling other people how to live.
Perhaps growing government revenue is as important as health is to such advocates. If they really believed these products to be so deadly, they would advocate banning them, not just taxing them. However, taxes are rising on tobacco to the point that for low-income people, they are tantamount to a legal prohibition, and a huge underground economy filled with violent crime and smuggling has sprung up.
All this is not to say that cigarette taxes should be zero. Cigarettes do impose costs on society that are not borne by smokers, which makes some tax per pack justified. However, nearly all studies conclude that the current federal and state tax rates raise enough revenue to offset those costs. States have decided to pile on in recent years, exaggerating the costs of smoking to justify raising more revenue than voters would be willing to pay in general taxes.
In effect, politicians are willing to impose taxes on the few, even though smokers are a small, low-income minority, so that they can provide free government benefits for the many.
Now there's something that stinks.
Prante is a staff economist at The Tax Foundation. The nonpartisan, nonprofit foundation has monitored tax policy at the federal, state and local levels since 1937.
Hearing on Tobacco: Taxes Owed, Avoided, and Evaded
Before the U.S. Senate Committee on Finance
Chairman Wyden, Ranking Member Hatch, and members of the Committee:
- Large differentials in cigarette taxes across states create incentives for black market sales.
- Smuggled cigarettes make up substantial portions of cigarette consumption in many states, and greater than 25...
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