Hiking the Cigarette Tax: Obama’s Plan To Burn Taxpayers and Inflame the Deficit

(originally published at thearkansasproject.com)

Alex Cartwright:

The Obama administration is once again attempting to control record deficits and government spending via a harmful short-term solution instead of developing a long-term strategy to address Washington’s systematic spending problem. Specifically, in order to pay for expanded preschool and cover other budget shortages, President Obama is proposing a 94 cent tax increase on cigarettes. This would bring the total federal tax on cigarettes to $1.95 per pack. Congress is also considering its own version of a tobacco tax increase. These short-term patches to our country’s spending problem will place an undue burden on consumers and vendors, while expanding the size and scope of government and possibly even adding to the deficit.
Perhaps the most potentially damaging effect of increasing taxes on tobacco products is that such a tax would be regressive: a disproportionately large portion of lower income earners use tobacco products. Therefore, increasing taxes on those products will place most of the burden on low-income people — those who work for a living. In the midst of economic turmoil, when all citizens face financial uncertainty, raising taxes on low-income citizens should be the farthest thing from a public policy priority. Furthermore, during his campaign, President Obama repeatedly pledged not to raise taxes – of any kind – on those making less than $250,000 per year. However, he has already raised taxes on tobacco once and appears to be setting the stage to break his promise again.
Unfortunately, tobacco users aren’t the only group who will bear the brunt of this massive tax increase. Hundreds of thousands of retailers in the U.S. depend on cigarette sales as an important source of revenue. According to the National Association of Convenience Stores, cigarette sales account for nearly 40% of all in-store sales. Arkansas alone has more than 1,700 convenience stores, employing over 19,000 Arkansans. Higher tobacco prices will presumably result in lower sales for these establishments — and the lost sales could be on more than just cigarettes! Tobacco users facing higher tax burdens will visit the store with less frequency and spend less money on other items.
Aside from the potentially harmful economic effects on consumers and suppliers that a tax increase would have during turbulent economic times, advocates of tobacco taxes should keep in mind that these taxes are already extremely high. In fact, in 2009 Congress enacted the largest cigarette tax in history. That same year the Arkansas Legislature raised taxes on cigarettes from $0.59 to $1.15. Today, tobacco products are some of the most excessively taxed products on the market, with taxes and fees accounting for about 60% of the cost of a pack. As a result, some reports indicate adult smokers paid over $44.9 billion in taxes and fees on cigarettes in 2012.
Raising taxes on cigarettes has been a sure-fire way for governments to raise revenue because demand for tobacco is relatively ‘inelastic’ (higher prices won’t cause a decrease in consumption like the same price rise would on a different product) since tobacco is addictive. However, even on tobacco products, higher taxes will not raise revenues indefinitely. Increasing the taxes on tobacco only increases the benefits of buying tobacco products illegally in a black market where buyers and sellers don’t pay any taxes at all. The Bureau of Alcohol, Tobacco, and Firearms & Explosives reported in 2009, directly after the FET increase, that cigarette
…smuggling has turned into a lucrative business for the criminals who trade cigarettes and other tobacco products on the black market…Nationally it’s estimated $5 billion in tax revenue annually is lost on the black market. Currently, for every 1000 cartons smuggled into the country, the federal government loses $10,066 and the state governments lose an average of $12,140.
For Arkansas, that number would likely be higher since our cigarette tax is the highest in the region.
Even though the Obama administration wants to use the funds from the tobacco tax increase to cover budget shortfalls, one study says that just the opposite could happen. An article published by the Congressional Budget Office in the New England Journal of Medicine explains that higher tobacco taxes, and less tobacco users, would extend the government’s responsibilities to provide entitlements as more citizens live longer. This extension in entitlements would, as the study estimates, actually add to the deficit. Therefore, a higher tobacco tax leaves consumers, sellers, and potentially even the government poorer in the long run.
An obvious argument in favor of tobacco tax increases is that tobacco is a public health issue that affects all of us. According to this argument, because tobacco users put their own health and others around them at risk, they should be forced to internalize some of the costs of their behavior via taxes. But tobacco taxes are not the best or even the only way to deal with the health issues tobacco causes. Many laws already exist that ban smoking in most public areas and studies have shown that the current tax levels, health insurance costs, and other costs that smokers must pay easily make up for any public damage smokers do.
The majority of Americans are not smokers, so an attempt to close a budget shortfall by taxing the minority is the less politically ‘troublesome’ route for the government to raise revenue. However, increasing cigarette taxes will lead to poor consequences for all Americans — not just smokers. Continuing to tax an already taxed-to-death habit to fill a budget shortfall is bad public policy for everyone. It could possibly lead to an increase in the deficit (a deficit we all pay for) and it is not a long-term, sustainable solution to Washington’s systematic spending problem. Short term solutions to long-term problems, especially when they come at the expense of low-income earners and businesses that are struggling to recover in the Obama economy, are not sound public policy. Permitting Washington to increase the tobacco tax will only increase the size and scope of government without making any progress towards repairing the causes of our spending problem.

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