Some U.S. Senators want to pass a huge cigarette tax hike to finance expansion of a government-run socialized health insurance program. The bill would increase the federal cigarette tax from .39 to $1.00 per pack and the cigar tax from 4.8 cents to an astounding 53% up to $10.00 per cigar.
The Senate Finance Committee will be marking up a bill this week to expand the State Children’s Health Insurance (SCHIP) program, a program started by President Clinton to provide government-run health insurance for low-income children who are not poor enough to qualify for Medicaid. Whatever the merits of SCHIP, its expansion should not be financed by hiking the regressive federal cigarette excise tax.
Excise taxes are bad policy. To minimize economic distortions, taxes should have a broad base and a low rate. Excise taxes are the worst departure from this principal, singling out specific products for excessive taxation, substituting coercive government power for free market pricing.
The cigarette excise tax is highly regressive, consistently borne by low-income Americans. A recent Tax Foundation study found that the burden of the existing federal cigarette excise tax is 7.5 times greater on the bottom income quintile than on the top. Increasing the tax would therefore undermine the purpose of an SCHIP expansion, because the tax would fall largely on the very families the expansion is intended to benefit. If the tax is used to finance expansion of the program to higher income families, the end-result would be to tax the poor to pay for government-run health benefits for lower-middle or even middle class. That’s wrong.
The cigarette excise tax also has contradictory purposes—while one stated goal is to discourage smoking, the tax also makes the government reliant on revenue from smokers—in this case for funding SCHIP. The tax is an unreliable revenue source, both because smoking is in general decline and because higher taxes tend to reduce sales.
Finally, there are limits to the enforceability of cigarette tax increases. Cigarette smuggling has dramatically increased in recent years and small smuggling operations are being supplanted by highly sophisticated organized crime syndicates.
For these reasons, Senators Menendez and Lautenberg should oppose any increase in the federal cigarette excise tax.
Steve Lonegan is the Mayor of Bogota, NJ, and Executive Director of Americans for Prosperity – New Jersey. Americans for Prosperity (AFP) and Americans for Prosperity Foundation (AFP Foundation) are committed to educating citizens about economic policy and mobilizing those citizens as advocates in the public policy process. He is a prolific writer, having been published in newspapers and blogs. He currently has a book in pre-publication on the impact of New Jersey state government on the well being of the taxpayers of the state, where he offers solid and workable solutions.