Cigarette Tax Bill Is New Congress’s First Tax Test

Published March 1, 2009

President Barack Obama helped sweep large Democratic majorities into both houses of Congress in large part by promising he would not raise taxes on any Americans making less than $200,000 a year and would provide most Americans with tax cuts.

That stand allowed Democrats to capture the traditionally Republican tax issue. It told voters that, this time, Democratic control of government wouldn’t mean steeply higher taxes.

However, there are rumblings one of the first orders of business for the expanded Democratic majorities in Congress will be to raise taxes on millions of Americans who are nowhere near being rich, including many below the poverty line. It’s a cigarette tax hike, included in a bill to dramatically expand government-run health care.

Passing it would signal that Democrats are still the party of higher taxes—and not just for the rich.

SCHIP Is Vehicle

The vehicle is a bill to reauthorize the State Children’s Health Insurance Program (SCHIP), and while we don’t know details yet, we can assume it will be similar to last year’s version, which increased funding $35 billion and expanded coverage from children in families making less than twice the poverty level up to three or even four times the poverty level.

This expansion is to be financed by raising the federal tax on cigarettes from 39 cents per pack to $1 per pack, a 156 percent increase, and raising taxes on other tobacco products by a similar percentage.

Such a tax hike would wallop the poor. An analysis by the Tax Foundation found cigarette taxes hit the poor harder than any other federal tax, hitting the bottom 20 percent of income earners 37 times harder than raising the same amount of revenue from the income tax does. While the income tax falls mostly on people with higher incomes, the cigarette tax falls heavily on less-affluent Americans.

Step Toward Universal Coverage

This dramatic expansion of SCHIP is a bad idea, regardless of how it’s funded. It would be a big step toward government-run children’s health insurance, which could, in combination with other program expansions, lead to a government-run health insurance system. Such a system would be rife with long waiting lines and substandard quality of care, judging by international experience.

Indeed, this comes at a time when the rest of the world is moving away from government-run health insurance. This is made even more egregious when funded by a cigarette tax hike that forces the poor to pay for extending this entitlement to middle-income families.

If the idea of the SCHIP debate as a proxy for socialized medicine sounds far-fetched, all we have to do is recall that in April 2007, an Illinois Congressman said the SCHIP debate is “spring training” for government-run health insurance. That Congressman was now-presumptive White House Chief-of-Staff Rahm Emanuel.

Violation of Tax Pledge

Understood in those terms, it’s easy to see how SCHIP expansion became such a disputed partisan issue, and why liberal Democrats have so avidly supported it.

The inclusion of the cigarette tax hike, however, in the 2009 version would be puzzling. Not just because it would blatantly violate the campaign promise made by Obama and other Democrats not to raise taxes on anyone outside of the top 5 percent, but also because it runs counter to the primary thrust of federal policy in this economic crisis, which is to shovel as many billions—even trillions—of dollars out of the Treasury and the Federal Reserve as possible, without respect to the outlook for federal deficits.

One argument for including the tax hike would be that SCHIP is an ongoing program that needs a dedicated revenue source to avoid permanently increasing federal deficits, unlike short-term bailouts and stimuli that are envisioned as one-time spending.

But that argument falls flat when the revenue source contemplated is a cigarette tax, a tax that is declining in revenues as smoking declines, and that in the long-term will approach zero because the tobacco industry no longer markets to non-smokers.

Punishing Smokers

The rationale that it’s less about raising taxes than discouraging smoking is a convenient one, but little comfort to many addicted smokers who find themselves unable to quit despite rising costs. Obama, who recently admitted he still smokes, should be more sensitive to how difficult it is to quit.

If there is a vote on increasing cigarette taxes, it will really be about one thing: Will Democrats let their desire to use taxes to control our lives win out over their promises to avoid tax hikes on the poor and middle-income?

If they decide punishing smokers with higher taxes is more important than their campaign promises, we can expect many more tax hikes to come—on the poor and middle-income as well as the rich.

Phil Kerpen ([email protected]) is director of policy for Americans for Prosperity. An earlier version of this article appeared in the January 1, 2009 edition of the Washington Times. Reprinted with permission.