Policy Documents

Federal Cigarette Tax Increase Unfit for SCHIP

January 12, 2009

Proposals to increase the federal cigarette tax by 61 cents (156 percent), in order to pay for an expansion of the State Children’s Health Insurance Program (SCHIP), are problematic. The program was established to ensure children from low-income families have health insurance. Expanding the program to include families making more than three times the poverty level should be worrisome to all taxpayers, smoking and non-smoking alike.

Cigarette taxes are highly regressive; they are a notoriously volatile source of revenue; and they discriminatorily target a small section of the population.

In the current economic environment, many policymakers are quite wisely shying away from raising taxes, especially broad-based taxes. But some policymakers incorrectly believe that cigarette taxes don’t have the same negative effects as broad-based taxes.

In fact, however, cigarette tax increases place a heavy burden on low-income earners. Analyzing the 2007 SCHIP expansion proposal, the Tax Foundation found “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.” So much for President-elect Barack Obama’s pledge to not raise taxes on poor and moderate-income families.

Cigarette taxes take a bigger share of the income of a low-income person than a high-income person, and the low-income person also pays more cigarette taxes in absolute terms. Dr. Dahlia Remler of the Department of Health Policy and Management at Columbia University acknowledged this in a 2004 study: “In the drive for better public health, we should acknowledge the price paid. Standard principles for assessing the equity of taxes should not be forgotten.”

Financing an expansion of SCHIP by increasing a tax whose base is already narrow and shrinking is fundamentally flawed and unsustainable. The combination of numerous state cigarette tax increases, a general decline in tobacco use, and the growth of various forms of tax-driven smuggling has caused tobacco tax revenues to flatten. As a Heritage Foundation study calculated in 2007, “to produce the revenues that Congress needs to fund SCHIP expansion through such a tax would require 22.4 million new smokers by 2017.”

Expanding SCHIP through a hike in the federal cigarette tax means relying on an unstable and regressive form of taxation, discriminatorily targeting a small minority of citizens, all for the purpose of funding yet another irresponsible expansion in government spending.

The following articles offer additional information on cigarette tax hikes and SCHIP.

 

Tax Hikes for the Poor
http://washingtontimes.com/news/2009/jan/02/tax-hikes-for-the-poor/
This op-ed, published in The Washington Times, explains why a dramatic expansion of the SCHIP program funded by cigarette taxes is just the tip of the iceberg when it comes to tax increases.

22 Million New Smokers Needed: Funding SCHIP Expansion with a Tobacco Tax
http://www.heritage.org/research/healthcare/wm1548.cfm
The Heritage Foundation outlines many of the problems associated with using cigarette taxes for programs such as SCHIP. The study finds 22 million new smokers would be need by 2017 to keep SCHIP solvent.

A State-by-State Estimate of the Impact of SCHIP Expansion and a 156 Percent Cigarette Tax Hike
http://www.taxfoundation.org/files/ff88.pdf
The Tax Foundation analyzes by state the impact of the proposed federal cigarette tax hike and reports how much per household SCHIP would cost.

Private Judgments + Public Policy = Sin Taxes
http://www.heartland.org/publications/budget%20tax/article.html?articleid=19658
Christopher Z. Mooney, professor of political studies at the University of Illinois-Springfield, has extensively studied how private moral judgments shape public policy. This interview with Mooney focuses on so-called sin taxes.

Key Facts All Lawmakers Need to Know About Tobacco Tax Increases
http://www.atr.org/content/pdf/2005/dec/120805ot-memo-tobacco.pdf
Researchers with Americans for Tax Reform explain the shortfalls associated with cigarette taxes and dispel many of the myths attached to them.

Federal Excise Tax on Tobacco
http://www.heartland.org/policybot/results.html?articleid=21601
This 2007 Research & Commentary by The Heartland Institute outlines “the myriad reasons SCHIP needs reform, prompting a discussion that concluded if the program were refocused on its original intentions, additional sources of revenue would not be necessary.”

Poor Smokers, Poor Quitters, and Cigarette Tax Regressivity
http://www.heartland.org/policybot/results.html?articleid=19564
Dr. Dahlia Remler, with the Department of Health Policy and Management at Columbia University, rebuts the argument that cigarette taxes are not regressive.

Cigarette Tax Burns the Poor
http://www.beaconhill.org/Portal/PDFVerClips/HeraldOpEd080416CigTax.pdf
David Tuerck, professor of economics and executive director of the Beacon Hill Institute at Suffolk University, outlines how cigarette taxes unfairly burden low-income earners.

The Cigarette Tax Increase to Finance SCHIP
http://assets.opencrs.com/rpts/RS22681_20070619.pdf
This Congressional Research Service study finds, “A 50 cent increase (in the federal cigarette tax), for example, would raise nearly $7 billion a year, but would cost state and local governments about $1 billion.” It goes on to outline how the tax increase would adversely fall on lower-income families.

Heritage Foundation: Expanding SCHIP Will Challenge State Finances
http://www.foxnews.com/story/0,2933,293667,00.html
This article explains how an increase in the federal cigarette tax will hurt state finances. This is often an overlooked issue that is of particular importance to state legislators.

 

For further information on the subject, you can visit the Tobacco Issue Suite on The Heartland Institute’s Web site at www.heartland.org.

Nothing in this message is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. If you have any questions about this issue or the Heartland Web site, you may contact Legislative Specialist John Nothdurft at 312/377-4000 or jnothdurft@heartland.org.