February 28, 2007

Should Cigarette Taxes Be Used to Pay for Healthcare?

Twelve states are considering proposals to hike cigarette taxes, mostly in order to pay for healthcare initiatives, while a proposal in the U.S. Senate would hike the federal cigarette tax to fund an expansion of the State Children's Health Insurance Program (SCHIP). Of the 12 states, seven would use the money for healthcare. In one of those states, Indiana, the increase may now be off the table. Governor Mitch Daniels's proposal to increase the tax from 55.5 cents to 80.5 cents was just rejected by the State House of Representatives.

In the U.S. Senate, Gordon Smith (R-OR) argues that increasing the federal cigarette tax from its current level of 39 cents to 79 cents would raise $31 billion over five years while increasing it to 99 cents would raise $46.5 billion over five years. Senator Smith is not proposing an actual bill but says he wants to show he's open to such measures, and Senate Finance Committee Chair Max Baucus (D-MT) is said to be supportive. Smith claims that using cigarette taxes would be justified by the link between cigarettes and healthcare, which is not exactly a watertight argument since the vast majority of children served would not be smokers. Of course, efforts to find revenue sources for SCHIP are welcomed. (SCHIP faces a shortfall and the President's proposed budget would leave 1.4 million fewer children served by the program in 2012.)

But there are two problems with cigarette taxes. First, as is the case with sales taxes generally, they are highly regressive, taking a far greater percentage of income from poor households than the wealthy. Second, they are bound to be a declining revenue source. The value of the tax is reduced over time with inflation, and if smoking really does decline as a result of the tax increases, then the revenue also declines, leaving important health programs in a lurch. Of course, if the real purpose is simply to reduce smoking, then cigarette taxes can be quite effective in that regard. For more, see the ITEP policy brief on cigarette taxes.


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