Federal Cigarette Tax Hike Proposed to Fund Medical Care

By Nathan Burchfiel | July 7, 2008 | 8:32pm EDT

(CNSNews.com) - Two senators have proposed increasing the federal tax on tobacco to fund the reauthorization of a program that pays for children's medical care, a move the tobacco industry says would be unfair and unreliable.

Sen. Ted Kennedy (D-Mass.) and Sen. Orrin Hatch (R-Utah) released a statement in June supporting an increase in the tobacco tax to fund the State Children's Health Insurance Program (S-CHIP), which is due for reauthorization this year. Kennedy and Hatch were the original sponsors of the program when it was created in 1997.

The federal government has spent nearly $40 billion on S-CHIP since its inception, according to the Congressional Budget Office. The program serves approximately 6.6 million children and about 670,000 adults.

Proponents of funding the program from tobacco taxes estimate that an increase in the per-pack cigarette tax by 61 cents -- making it an even $1 -- would raise $50 billion over the next five years.

"The public health benefits resulting from higher tobacco costs are well documented," the American Academy of Family Physicians said in a June letter to members of Congress supporting a higher tobacco tax.

"Studies show that every 10 percent increase in the price of cigarettes reduces youth smoking by seven percent and overall cigarette consumption by four percent," it added.

"By discouraging smoking through an increase in the tobacco tax and using the resulting revenues to improve enrollment in children's health insurance programs, we are creating a win-win proposition in support of our children's health," the letter stated.

Bill Phelps, a spokesman for Philip Morris USA, which produces Marlboro and Parliament cigarettes, said the company opposes the proposal "because we think it's unfair, and it could result in some unintended consequences."

Phelps said it is "unfair to adult smokers as well as tobacco retailers" to burden the smoking population with funding S-CHIP.

A study released this month by the National Center for Policy Analysis suggested that behavior-related excise taxes, such as taxes on tobacco and alcohol, are regressive -- they disproportionately affect the poor.

"Because they are simply narrowly-focused consumption taxes, they drain a larger share of the incomes of lower earners than of higher earners," the study said.

"Consider two families, one earning $10,000 a year and the other earning $100,000. If both spend $100 a year on cigarette taxes, the amount constitutes one percent of the lower earner's salary, but only 0.1 percent of the higher earner," according to the study.

The effect is increased by the fact that poorer Americans are more likely to be smokers than wealthier Americans. "[T]hose with lower incomes actually spend more in real dollars [on tobacco and alcohol] than higher-income people, on the average, making the regressivity problem even worse," the study said.

It said behavioral taxes are popular because "the tax is paid only by those who engage in socially undesirable behavior."

But it adds that "policymakers should also be concerned with the economic well-being of their lower-income constituents. One must question the question the fairness of hiking taxes that are known to disproportionately burden poor families."

Phelps said that in addition to unfairly burdening the poor with the cost of S-CHIP, tobacco taxes are "really not a long-term solution to a fiscal issue," because tobacco use is declining.

"Relying on the cigarette excise tax to fund an important government program such as S-CHIP will create some long-term funding shortfalls that will have to be paid for with other budget revenues or through additional tax increases," he told Cybercast News Service.

He said cigarette consumption has been declining by two percent a year in recent years while the costs of the services provided under S-CHIP have grown an average of four percent every year. But in spite of declining smoking, the federal and state governments collected more than $21 billion in cigarette taxes in 2006, up from $13 in 1999.

The NCPA study reported that higher cigarette prices do not heavily impact smoking patterns. While some smokers will quit, the losses are offset by the higher taxes being paid by people who continue to smoke.

Rick Kellerman, president of the AAFP, said the fairness argument against tobacco taxes "just doesn't make any logical sense" because smokers engage in a habit "for which there is absolutely no social value."

"If this was a tax on food or gasoline where people have to travel -- you know, to get to their jobs and that sort of thing -- I think that is an argument that we clearly need to think of," Kellerman told Cybercast News Service.

"But on the other hand, tobacco is something for which there's been absolutely zero social benefit, tremendous amounts of harm, tremendous amounts of suffering of families due to the illnesses of family members, so I disagree with that analysis," he said.

Kellerman said the AAFP wishes "everybody would stop smoking and every teen would not start," but he disputed the argument that trying to reduce smoking is counterproductive to the goal of funding a government program with tobacco revenue.

"The perfect thing would be if nobody smokes and we didn't have to have a tobacco tax," he said. "I mean that would be perfect, but the fact of the matter is that we've got so many adult that still smoke that there's going to be tax money coming in to fund CHIP."

He predicted that "it's going to be a long time before there's any significant decrease of funding coming in through the tobacco tax."

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