April 06, 2007

Tax Foundation Opposes Senator Smith's Cigarette Tax Hike - And Convinces Me I Should Like It

It's strange how two people can look at the exact same set of facts and come to opposite conclusions. Today I saw a chart published by the conservative Tax Foundation that they use to criticize a proposal to increase federal cigarette taxes - and suddenly I think I might support this proposal for the first time.

Before the Senate passed its budget two weeks ago, members approved an amendment proposed by Gordon Smith (R-OR) to raise the federal tobacco tax from 39 cents to a dollar per pack and use the money to expand the State Children's Health Insurance Program (SCHIP). The amendment is more of a statement of Congress's goal rather than binding legislation. It doesn't require Congress to act but just clears away any hurdles in the budget process as long as the SCHIP expansion is actually paid for by the tax increase.

We generally frown upon cigarette tax increases because they are regressive. Since low-income people don't smoke any less than wealthier people and pay the same taxes per pack of cigarettes, these taxes take a larger share of their total income. It's true, or course that expanding health care for children is an extremely important priority, and SCHIP is a progressive program targeted at low-income and middle-income families. And frankly, we should be glad when Congress actually wants to pay for an initiative as opposed to just increasing the national debt. But we usually prefer to find a way to pay for things that doesn't cause the tax code to become less progressive.

The Tax Foundation put out a paper showing how the proposal would affect different income quintiles. The chart near the bottom of the paper shows SCHIP spending, minus the cigarette tax paid, on each quintile. The bottom two come out ahead, the middle basically comes out even, and the top two quintiles lose a bit. People in the top income quintile, for example, lose about a hundred dollars a year. This is logical, since wealthier people will receive little benefit from SCHIP so the cigarette taxes they pay will outweigh any added benefits from expansion of the program.

The Tax Foundation, remarkably, sees this as justification to oppose the Smith proposal. I look at this and suddenly feel much better about the Smith proposal. The cigarette tax increase is regressive in itself, but the proposal as a whole is actually progressive.

Thank you Tax Foundation, I feel much better now.


At 4:41 PM, Anonymous Anonymous said...

The problem is that it could be much more progressive if SCHIP was funded by merely general revenue.

At 7:15 PM, Anonymous Anonymous said...

This totally doesn't follow at all. You say you feel better about the proposal because it's progressive as a whole. But compared to what?

Funding SCHIP expansion with a cigarette tax is much less progressive compared to doing the same thing with an income tax. You're ignoring much better alternative ways to fund the proposal, such as with an income tax increase, which would be far more progressive.

Policy is about alternatives, and because there are better alternatives than cigarette taxes, you should oppose this plan even more heartily in light of that analysis, not less.

At 10:29 AM, Blogger Steve W said...

These comments are both correct in that an SCHIP expansion would obviously be more progressive if funded by general revenue.

But there are some alternatives that are worse and maybe as likely. Perhaps Congress will not pay for the SCHIP expansion at all. Congress could just do nothing, which would be the worst outcome, or Congress could enact an SCHIP expansion that is deficit-financed, which is not a great outcome.

Increasing the national debt is not a progressive policy because there is no way to guarantee that the burden of paying it off will fall on the affluent rather than on low- and middle-income Americans. Also remember that in the past six years deficit-reduction has always meant cutting programs for the poor who don't have powerful lobbies. Maybe the best way to avoid this is to avoid deficits in the first place when it's possible.

One of the comments argues that I am ignoring the possibility of increasing the income tax in order to fund such an initiative. I will say it now: I would fully support increasing income taxes (particularly the top rates) in order to fund such initiatives. That would be the best alternative. This conversation is really about what happens if Congress is only willing to pursue a second-best option.

At 1:30 PM, Blogger Andrew Oh-Willeke said...

FWIW, it is an increase in the federal tobacco tax, not the federal gas tax. Clearly a typo, but just saying.

At 1:35 PM, Anonymous Anonymous said...

I don't understand how we can continue to finance our country on the tobacco industry. What if the anti-smoking efforts took hold and cigarette 'consumption' fell by 20%? Can you imagine the results on the state & federal governments? I get annoyed when we talk out of both sides of our mouths...


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