Tobacco Tax Hikes... A Lesser Evil?


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People who follow tax issues know that cigarette taxes are regressive, meaning they take a larger percentage of a poor person's income than a wealthy person's income. This is generally true of other consumption taxes such as sales taxes and gasoline taxes because poor people consume a larger percentage of their income than wealthy people, who have the luxury of saving and investing a large percentage of their income.

So cigarette taxes are not the best way to raise revenues from a fairness perspective. But there seem to be situations in which the only tax increases politicians will tolerate are the unfair ones. The state legislature in Delaware wanted revenue to address health and school construction, and just raised $48 million by increasing cigarette taxes from 55 cents to $1.15 a pack. Raising progressive taxes (for example, state income taxes) would be a fairer alternative, but tobacco taxes may be a second-best option when lawmakers refuse to increase other taxes.

New Hampshire just enacted a budget that includes a cigarette tax increase of 28 cents to $1.08 a pack as well as several other regressive fee hikes. While this is unfortunate, the budget also expands children's health insurance by as many as 10,000 kids, which might be hard to do in tax phobic New Hampshire. In Connecticut, the legislature recently approved a budget that raises the cigarette tax 49 cents to $2 per pack in a compromise between Republican Governor Jodi Rell and the Democratic-controlled Assembly. (Rell had earlier suggested increasing income taxes but quickly changed her mind about that.)

Now members of Congress are eyeing an increase in the federal tobacco tax from 39 cents to $1 a pack to fund an expansion of the State Children's Health Insurance Program (SCHIP). Some members of both parties on the Senate Finance Committee have come to a tentative agreement to raise $35 billion over 5 years (less than the $50 billion envisioned in the Senate budget passed several months ago). One can imagine many more progressive ways of raising federal revenues. But if the Senate lacks the leadership and courage to fight for more progressive funding sources, this may be the best chance to expand children's health care this year.

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