Addicted to Cigarette Taxes

March 6, 2008

Congress is currently considering bills (H.R. 1108 and S. 625) authorizing the Food and Drug Administration to regulate the tobacco industry. Largely unnoticed is the fact that this legislation would perpetuate injustice in the tax system.

Benefit Principle
Governments produce two types of services. The first type has broad benefits which aid all in society. National defense and police protection are obvious examples, and there is a general consensus that everyone should pitch in to help shoulder the cost of such programs. As a result, weapons systems and soldiers’ salaries are paid for with broad-based taxes on the income earned by most Americans.

The other type of government benefit goes to few people. When governments build swimming pools and other recreational facilities, for example, there is often an effort to charge user fees commensurate with the costs of operating such facilities. The logic here is straightforward: since so few people use those facilities, it’s unjust to make everyone pay; the users should pay fees.

Proposed Legislation to Regulate Tobacco
Proposed legislation would have FDA scientists study the health effects of cigarettes and inform smokers of the consequences. To defray the FDA costs, smokers would be charged a fee. This is in line with the benefit principle, but some other provisions don’t measure up.

Congressional analysts theorize that if smokers become better informed about the risks, some will quit and cigarette excises flowing into the general fund would dip. So to make up for this estimated revenue loss, the legislation hikes the proposed fee well above what’s needed to pay for FDA regulation.

Equitable Taxation
Existing cigarette taxes are already widely acknowledged to be too high given the benefit principle. Peer-reviewed studies produced over the last two decades have shown conclusively that nearly all of the costs of smoking – healthcare, higher insurance premiums, lower productivity at work – are borne by smokers themselves and that high federal, state, and local cigarette taxes effectively transfer wealth from generally low-income smokers to relatively affluent nonsmokers.

If Congress decides to have the FDA regulate the tobacco industry, it should charge a user fee equal to the cost of providing consumers with information on risk but not more. It should then consider lowering cigarette excises so that services which provide for the general welfare are funded with truly broad-based taxes.

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