Sunday, December 11, 2005

Tobacco Taxes: the new look of predatory taxation?

The push is on – again – to move a tobacco tax increase in the legislature. The QC Times ran this editorial on Saturday.

Iowa can do better than ‘cheap cigs’

What do Kentucky, North Carolina, South Carolina, Missouri, Mississippi, Tennessee, Virginia, Florida, Louisiana and Iowa have in common? …

… Cheap cigarettes? That would be it.

These are the bottom 10 when it comes to taxing cigarettes. We can understand the reluctance of Kentucky and the Carolinas, tops in the nation in tobacco production.

But Iowa?

Gov. Tom Vilsack has renewed his now annual pledge to hike cigarette taxes and we’re with him again. He’s proposed an 80-cent per pack tax, still short of the $1 per pack we’ve endorsed and already is law for 17 states plus the District of Columbia. Illinois is almost there at 98 cents per pack.

Why tax cigarettes? They cost non-smokers money. Iowa, like all states, subsidizes medical care for those suffering from smoking-related illnesses. No individual smoker could begin to personally cover treatment costs that a lifetime of smoking can incur.

We would hope this tax raises less and less money each year. …

I don’t smoke, no one in my family smokes, and as for subsidizing smoker health care, I am sure we subsidize other habits – think excessive cheeseburger & fries consumption for one. I have given up my bleeding heart, so the “oh, those poor unhealthy smokers, we must save them from themselves by increasing the tobacco tax” crap does not inspire. And it may not be all together true.

Anti-smoking advocate Frank Chaloupka implies that tobacco taxes are “progressive” as they encourage different behavior (link, pg 35). Confused? What he really means is that the tax becomes such a burden that some smokers quit to avoid taxation. That’s not tax progressivity, that’s an example of opportunity costs.

What these tobacco tax fans always fail to mention is that tobacco taxes are, and always will be, regressive. They universally hit low-income smokers harder than any other segment of the population. Professor Dahlia Remler reaffirms this regressivity problem in her recent academic publication, PROGRESS, SETBACKS, AND FUTURE NEEDS: Poor Smokers, Poor Quitters, and Cigarette Tax Regressivity. She states:

Progressivity (equity across income groups) is sensitive to the way in which tax burden is assessed. Analysis of horizontal equity (fairness within a given income group) shows that cigarette taxes heavily burden poor smokers who do not quit, no matter how tax burden is assessed. (link)

In another section of Chaloupka’s presentation, he compares price increases to smoking cessation rates; for every 10% increase in tobacco tax only 1% or 2% of smokers will quit (link, pg 11). That’s a small number of successful quitters. Whether we like it or not, we produce an inequitable tax when legislatures pass tobacco taxes without considering how to offset the cost for the large number of low-income smokers that don’t quit.

I find it ironic that in one instance (outside of Al Sharpton) liberals are extraordinarily concerned with predatory lending, and yet have no problem with predatory taxation in the form of aggressive tobacco tax increases. This is particularly true given that Iowa doesn’t need new tax revenue…just the will to stop spending.


Comments:
I oppose a cig-tax increase because it is regressive. And when it comes down to it, you'll have some families stretch to buy that pack of smokes rather than bread for their children. That's real world, and that's regressive.

One thing I can't understand - why can't cig-tax advocates get their message straight? If the goal is to really stop people from smoking, then that's fine. If the goal is to increase revenue for health care programs like the state's medicaid shortfall, that's fine too.

But you can't have it both ways. Less smokers = less revenue.
 
It's true that when tobacco taxes go up the use of the products declines. The tobacco tax works as a policy tool to keep some people away from the stuff.

However, you can't ignore the costs to all those folks who are hooked and don’t quit. The Democrats are making the tobacco tax a signature issue this year. I think it’s nuts, but if they insist upon making a tobacco tax increase an important cause they might want to think about how to off-set the regressivity problem through credits or enhanced smoking cessation programs. Democrats need to think about policy that can be of some help to low-income smokers who don’t quit, or their rhetoric about caring for the poor just rings hollow. Then again, they do want to increase the minimum wage and that’ll help the increase cost of cigs.
 
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I have a mortgage calc site/blog. It pretty much covers mortgage calc related stuff.

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