SCHIP Tax Increase Looms

Congress may be on the verge of increasing tobacco taxes to expand the federal SCHIP health care program so that it covers not only low-income households but also, potentially, households making up to $83,000 per year. Cigarette taxes would rise 61 cents to $1, while taxes on premium cigars would go up from 5 cents to as much as $10. Bush has threatened to veto the expansion as too costly, but since the Senate voted for the bill by a 68-to-31 margin, it is possible that the Congress will pass it over his veto.

The Heritage Foundation says the expansion is so costly that it will violate Congressional budget rules and result in new deficit spending despite the tax increase.

There are major flaws in the bill. The bill’s sponsors claim it will reduce the ranks of uninsured children (although some states are using the program to cover even childless adults, and stick federal taxpayers with part of the tab). But as Michael Cannon explains, most people joining the program already have health care coverage. They are just dropping their private health care coverage in order to obtain health care coverage at the taxpayer’s expense.

The tax that would fund the program expansion is poorly structured from a public health perspective. It levies the highest taxes on cigars — whose consumers often don’t smoke very many of them, much less get cancer from them — while levying a flat tax of $1 per pack on all cigarettes, regardless of whether they are expensive premium cigarettes or cheap discount-brand cigarettes.

It is dumb to impose a flat $1 tax on all cigarette packs, rather than imposing a tax that is a percentage of the purchase price of the cigarettes, the way a typical sales tax is. People who smoke cheap discount-brand cigarettes are often poor people who have tried and failed to quit, and keep smoking because they are tobacco addicts, even though they are well aware of the health risks of smoking. Increasing taxes on them won’t make them stop smoking; it will just cause them more financial misery.

By contrast, impressionable young people who are still making up their minds about whether to smoke tend to smoke premium brands like Marlboro, Newport, or Camel, that they view as prestigious. Unlike older people, who have long ago figured out that smoking is not glamorous or sexy, they think that they can make themselves more popular by smoking. But they wouldn’t be caught dead smoking cheap, no-name cigarette brands, which none of their peers smoke, so there’s no point increasing the tax on those cigarettes by the same amount as the tax on expensive premium brand cigarettes.

Instead, taxes should be a percentage of the purchase price of the cigarettes, so that the expensive premium brands that young people smoke go up most in price as a result of any tax increase. That way, the tax increase will do more to discourage smoking by young people who have not yet become addicted, without further impoverishing the poorer, older tobacco addicts who smoke discount brands of cigarettes.

The tax increase Congress proposes, unfortunately, does nothing of the sort.

Critics also say that the tax increase on cigars will destroy thousands of jobs in the premium cigar industry by increasing cigar taxes from 5 cents to as much as $10.