I recently attended a lecture given by Arnold Kling, who is a former Federal Reserve economist on the Board of Governors staff, former senior economist at Freddie Mac, and all-around financial and monetary expert. The...
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CBPP Puts Out Misleading Information on Poor and Cigarette Taxes
President Bush's decision to veto the smoker-funded SCHIP expansion has elicited some silly new counter-arguments from the Center on Budget and Policy Priorities (CBPP), specifically over who's going to pay for it: smokers who are disproportionately poor.
In the past, the tax-raisers at CBPP ("the Center") have balked somewhat at tobacco taxes, knowing they hit the poor hardest.
But in the current, feverish campaign, that sympathy for the poor has been twisted. CBPP has instead partnered with the Campaign for Tobacco Free Kids to publish a report saying that higher cigarette taxes are actually good for the poor.
It's a typical nanny-like lecture telling poor people that because they're not smart enough or strong enough to quit smoking, the government will do them a favor by making them pay higher taxes, encouraging them to quit, as the Center puts it "freeing up funds for family needs."
But are low-income people as a group going to be better off even if people "should quit smoking because it's good for them?" The Center tries to spin the numbers in a way that makes it sound like this is great for the poor by saying this: "...more than three-quarters of the smokers who would be expected to quit in response to the 61 cents per pack cigarette tax increase in the bipartisan legislation have incomes below 200 percent of the poverty line." That three-quarters fact is essentially meaningless and highly misleading. There are 45 million smokers (according to CDC), of which 40 percent are poor (according to the Center), and 1.4 million are predicted to quit from this tax increase (Source: American Cancer Society). So if 75 percent of those who quit are poor, that means 1.05 million poor smokers will quit. But that's out of 18 million poor smokers, meaning the percentage that quit is actually 5.83 percent. In other words, about 94 percent of the poor smokers would continue smoking and pay higher taxes in the process.
Therefore, assuming the price of a pack of cigarettes is currently $5 per pack including tax, then this tax increase would actually INCREASE the amount that low-income households spend on cigarettes by a 2 to 1 ratio, and that even assumes they are currently not going to the black market due to high state-local taxes. In other words, as a result of the proposed tax hike, for every $1 that would have "freed up funds for family needs" by reducing tobacco spending for low-income households, $2 would be spent "tying up funds for family needs" by increasing tobacco spending on low-income households.
Because these smokers won't quit, they'll be paying $1 a day to Uncle Sam (following the proposed 61 cent hike to pay for SCHIP) on top of the $1 a day that is typical for a state-level tax. That's over $700 a year, serious money for a poor person. And the tax bill would be over a $1,000 in tax for a pack-a-day smoker in nine states with even higher taxes (Alaska, Arizona, Hawaii, Maine, Michigan, New Jersey, Rhode Island, Vermont and Washington, as well as NYC.)
But even if high taxes are good for poor smokers as the paternalists claim, why stop at a $1 or $3 or $5 per pack? States are selling $50 lottery tickets now, most of which is a tax on low-income people. Why not a $50-per-pack tax on cigarettes if you truly wanted to get people to quit (or go black market for cheaper cigarettes) to "free up funds for family needs."
According to the CBPP logic, the poor would be much better off with any cigarette tax hike, regardless of what program the revenue funds like SCHIP. Actually, even if the government raised the cigarette tax and used the money to give tax cuts to people making over $10 million or, say, fully repeal the estate tax, according to the Center's argument, poor people would be better off. (However, the Center would likely still cite CBO distributional tables showing that the federal tax system had gotten less progressive as a result of such a tax change because the CBO numbers would show the excise tax hitting the poor.)
This paternalistic attitude that high taxes are good for poor smokers might logically lead to another Prohibition like the one on liquor in the 1920s. But that's unlikely because it wouldn't raise money for government programs, which is really the only reason that the CBPP has gone all-out for raising the cigarette tax. If the paternalists at CBPP were truly concerned about the poor's tobacco use, they would have been advocating a cigarette tax hike a year ago when SCHIP wasn't even on the table, and would actually be favoring a much higher tax than $1 per pack.
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