Federal Cigarette Tax Increase Signed Into Law; Raises Taxes on Families Earning Under $250,000

February 5, 2009

President Obama yesterday signed into law H.R. 2, a 4-1/2 year reauthorization of the Children’s Health Insurance Program (formerly State Children’s Health Insurance Program). The bill is estimated to fund health insurance for the existing 7 million beneficiaries, and expand it to a net further 4 million at 300% of the poverty level with the most favorable federal matching funds. (I say “net” because it takes into account children who currently have private insurance, and a smaller number who have Medicaid, who will be induced to drop it and enter the more generous government program.) It had passed the House by a vote of 290-135 and the Senate by a vote of 66-32.

The “pay for” for the reauthorization is a hike in the federal cigarette tax from 39 cents per 20-cigarette pack to $1.0066 per 20-cigarette pack, effective March 31, 2009. As my colleague Gerald Prante and I noted, a politically popular and expensive program should never be funded by a small, low-income, politically unpopular minority like cigarette smokers. Just because the government needs revenue to fund some general spending program that has broad benefits doesn’t mean that an arbitrarily selected group of people should pay the tax. Popular, expensive, broadly available public programs should be paid for with broad-based taxes on income or consumption. In our paper, we run through many of the non-revenue reasons for raising cigarette taxes for S-CHIP and find them wanting.

As some have noted, this law breaks President Obama’s campaign pledge that “no family making less than $250,000 a year will see any form of tax increase…not any of your taxes.” According to the Bureau of Labor Statistics, 95.8% of tobacco expenditures are made by consumer units (people spending together) who earn under $150,000 a year. Essentially all of this tax increase will be paid by families earning less than $250,000, and probably those earning substantially less than that.

Here’s the video of the President’s campaign pledge:

More on cigarette taxes here.


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