On March 19th, 2014, the Center on Budget and Policy Priorities released a paper praising President Obama’s plan to raise the federal cigarette excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. in order to finance early childhood education.
The cigarette excise taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. is regarded as a regressive taxA regressive tax is one where the average tax burden decreases with income. Low-income taxpayers pay a disproportionate share of the tax burden, while middle- and high-income taxpayers shoulder a relatively small tax burden. because it targets smokers, a population that has lower levels of income on average than the U.S. population at large. From CBPP: “29 percent of poor adults smoke, compared to 18 percent of non-poor adults” and “expenditure for cigarettes account for a greater share of lower-income households’ budgets.”
Generally, CBPP is opposed to regressive taxes and favors the more progressive income tax. But this time, the regressivity of the cigarette tax doesn’t bother CBPP.
They say that a cigarette tax isn’t really that regressive because the population that pays the tax benefits the most from the tax through health benefits and increased funding for early childhood education. They are getting what they pay for.
In essence, the CBPP is endorsing the benefit principle: a principle that states that taxes people pay should reflect the benefits and the costs of services they receive.
I assume this means the CBPP will be more sympathetic to these statements now:
- Raising sales taxes while lowering income taxes in states in order to move to a more consumption-based tax system is okay. Even though low-income households could pay more in taxes as a percent of income than they currently do, they are benefitting from both the public services these taxes are paying for and the resulting economic growth from a more neutral tax system.
- The Institution of Taxation and Economic Policy is wrong to say that states that rely on sales and excise taxes to fund government programs have “particularly regressive tax systems” and are “terrible” because these revenues fund programs that benefit low-income individuals.
- U.S. corporations’ foreign income should be exempt from U.S. taxation because that particular business activity does not benefit from U.S. government services and infrastructure. After all, they are already paying taxes to the countries in which they are operating.
- The current level of progressivity in the tax code is too high considering high-income taxpayers only receive $0.25 cents in government spending for every dollar they pay in taxes. Their tax payments should be lowered, or benefits increased so they, too, can get when they pay for in government services.