Sen. Webb Points Out Fallacy of Tobacco Tax Reliance — He Should Go Further

January 28, 2009

Senator Jim Webb makes some excellent points in his proposed amendment to the bill that reauthorizes and expands a public health insurance program (CHIP, formerly called S-CHIP). Webb prefers not to rely exclusively on tobacco taxes.

He makes some of the same arguments that the Tax Foundation has made, that because tobacco is mainly a vice of the poor, the cigarette tax is steeply regressive. Since the expansion of the CHIP program benefits middle-income people, it is unseemly, even outrageous, to fund it with a tax on the poor.

In addition, as tobacco taxes have skyrocketed at the state level (average tax now $1.18 per pack), smuggling has greatly reduced the predictability of tobacco tax revenue, rendering it unsuitable as the sole revenue source for an expensive program.

As strong as Webb’s argument against dependence on the cigarette tax is, his solution is weak. He suggests that the federal cigarette tax rise from 39 cents per pack to $76 cents instead to $1. And he makes up the difference by taxing so-called carried interest as wage income instead of as a capital gain.

Webb’s argument against tobacco taxes is strong enough to support a much different solution. A popular, expensive, broadly available public program like CHIP should be funded with broad-based taxes. That means the federal income tax, the one that all of us pay. Webb does turn to the income tax, but he only wants it to apply to a tiny group of politically unpopular people – Wall Street investment managers.

The government should stop the targeted taxation of unpopular people, whether smokers or investment managers, to fund programs for the rest of us.


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