Raising Cigarette Taxes to Fund Higher Spending

September 29, 2006

In the race to be the next governor of Oregon, current governor Ted Kulongoski is seeking to raise the state’s tax on cigarettes in order to fund health insurance for children of the state. From the Oregonian:

Gov. Ted Kulongoski proposed increasing cigarette taxes by nearly 85 cents Monday to give health coverage to thousands of uninsured Oregon children.

Under Kulongoski’s latest plan, Oregon’s tax on a pack of cigarettes would go to $2.025 from the current $1.18, giving the state an estimated $150 million to $170 million in added money for health programs. The increase would bring Oregon’s cigarette tax in line with Washington’s.

The money would be used to expand the Oregon Health Plan to allow more families to get health insurance for their children. Under Kulongoski’s plan, the state would subsidize health coverage for children on a sliding scale up to a maximum income of $70,000 for a family of four.

A family of four making less than $40,000 would get fully subsidized health care for those younger than 19. (The Oregonian)

If health for children is truly a public good that is the role for government, why should it be funded by only cigarette taxes? The answer is that it shouldn’t if we truly care about what is good tax policy. The problem, however, is that it is easy for lawmakers to take advantage of situations where a majority wishes to gain from a certain policy or program whose high costs are imposed on some political minority merely becase it is the easiest way to get extra revenue.

The proper tax policy is to impose a tax on cigarettes that is a per unit tax equal to the negative externality imposed on society from the consumption or production of the product. It should not be used as a general revenue source that is raised or lowered merely to fund some government program, regardless of how desirable that program may be. Funding such a program should be done by having a broad-based tax increase like that on income or all sales. Unfortunately for those in leadership, that is typically less politically feasible for most lawmakers, so instead they wish to push a significantly high tax onto a small group of taxpayers. As the old saying goes: “Don’t tax you. Don’t tax me. Tax that guy behind the tree.”

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