Fiscal Fact No. 92
This past week, Senate negotiators agreed on a bill that would increase the federal cigarette 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. by 156 percent (from 39 cents to $1.00) in order to raise $35 billion for the popular SCHIP program that gives federal money to states for children’s health insurance. SCHIP is set to expire at the end of fiscal year 2007 (Sept. 30).
Unfortunately, this proposal is an abuse of sound tax and 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.
As Table 1 shows, no other federal tax hurts the poor more than the cigarette tax. Other taxes the federal government could use to raise $35 billion are displayed by income class.
Table 1
Cigarette Taxes Are the Most Anti-Poor Method of Funding S-CHIP
|
Household Income Quintile |
Taxes that Could Be Used to Raise $35 Billion to Fund S-CHIP Expansion (Average Tax Increase per Household in Quintile) |
||||||
|
Cigarette Tax Increase |
Alcohol Tax Increase |
Gas Tax Increase |
Air Transport Tax Increase |
Corporate Income Tax Increase |
Payroll Tax Increase |
Individual Income Tax Increase |
|
|
All Households |
$309 |
$309 |
$309 |
$309 |
$309 |
$309 |
$309 |
|
Bottom 20 Percent |
$249 |
$142 |
$100 |
$62 |
$39 |
$41 |
$7 |
|
Second 20 Percent |
$330 |
$214 |
$199 |
$148 |
$143 |
$160 |
$62 |
|
Middle 20 Percent |
$359 |
$312 |
$294 |
$236 |
$248 |
$297 |
$163 |
|
Fourth 20 Percent |
$336 |
$423 |
$414 |
$423 |
$414 |
$469 |
$348 |
|
Top 20 Percent |
$291 |
$589 |
$713 |
$901 |
$944 |
$806 |
$1,277 |
|
Source: Andrew Chamberlain and Gerald Prante, “Who Pays Taxes and Who Receives Government Spending? An Analysis of Federal, State and Local Tax and Spending Distributions, 1991 – 2004,” Tax Foundation Working Paper, No 1. |
Not only are the payers of cigarette taxes poorer as a group than the payers of these other taxes, but there are 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 CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (EITC) by one-fourth.
Why Are Smokers Taxed Again and Again?
Taxes on tobacco products have soared in recent years. As Table 2 shows, in just a five-year period from 2000 through 2005, tobacco tax collections rose 45 percent, according to the Department of Commerce. Not even property taxes have grown that fast, despite a housing bubble that pushed property taxes up at a historically rapid pace, starting a nationwide flurry of property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services.
relief measures. For more on how cigarette taxes have risen dramatically over the past five years, see Tax Foundation Fiscal Fact, No. 93, “State Tobacco Tax Rates Have Skyrocketed Since Last Federal Tax Increase.”
Table 2
Tobacco Taxes are a Fast-Growing Source of Government Revenue
|
Tax Category (BEA) |
Percent Change in Collections from 2000 to 2005 |
|
Special Assessments |
79.5% |
|
Severance Taxes |
69.8% |
|
Taxes on Insurance Receipts |
55.1% |
|
Taxes on Corporate Income |
50.8% |
|
Tobacco Taxes |
44.7% |
|
Property Taxes |
37.6% |
|
Air Transport Taxes |
26.3% |
|
Payroll Taxes |
25.3% |
|
General Sales Taxes |
22.7% |
|
Customs Duties |
19.9% |
|
Motor Vehicle Licenses |
17.9% |
|
Alcohol Taxes |
13.4% |
|
Gasoline (and Diesel Fuel) Taxes |
13.3% |
|
Personal Income Taxes |
– 3.1% |
|
Source: Tax Foundation calculations based on data from the Bureau of Economic Analysis, Dept. of Commerce |
Taxes on tobacco products increased three times faster than alcohol taxes, the other major “sin tax,” from 2000 to 2005. The most likely reason for the disparity is that a majority of citizens enjoys alcohol while smokers are a minority, about 20 percent of the population nationwide.
Powerful special interest groups pushing “public health” have been able to bring the non-smoking majority along with their campaign to tax smokers. John Stuart Mill would call it a tyranny of the majority: politicians have identified an unpopular minority and forced punitive taxes on them.
These advocates of higher taxes on tobacco, regardless of the impact on the poor, are frequently accused of being modern-day temperance workers who busy themselves telling other people how to live.
In addition to campaigning for high tobacco taxes, they often advocate special taxes on other unhealthy products like soda, candy, alcohol, etc. What’s next, tanning beds? Extreme mountain climbing? Bacon cheeseburgers? Tony Blair has labeled such policies as representing a “nanny state.”
Perhaps growing government revenue is as important as health to these nanny-staters. 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, and so, despite the low-income profile of smokers, some tax per pack is justified. However, most empirical studies of these costs conclude that the current combined tax (federal and state/local) are already more than enough.1
Conclusion
Taxing only cigarettes to finance higher spending on SCHIP has absolutely no justification in sound tax policy. 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.
es on cigarettes should be used to compensate for the costs they impose on society. Taxes levied above and beyond that point may be politically expedient because smokers are unpopular, but they only serve to make the federal tax system less principled and more regressive.
Notes
1. See, for example, Patrick Fleenor, “Who Bears the Ancillary Cost of Tobacco Use?,” Tax Foundation Background Paper, No. 36 (January 2001), available at http://www.taxfoundation.org/legacy/show/121.html.
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