Doubts Voiced On Gain From Tobacco Tax

June 01, 1994|By Ian Johnson | Ian Johnson,Sun Staff Writer

WASHINGTON -- When White House officials began floating ideas for health care reform last year, one trial balloon had no trouble staying aloft: a 75-cent-a-pack tax on cigarettes that would raise $11 billion a year. Catching the growing anti-tobacco mood of the country perfectly, the Clinton administration's proposal was seen as an easy way to raise money, discourage an unhealthy habit and offend relatively few voters.

"There is a changing public attitude toward smoking. It's no longer seen as just a personal decision but a real health problem for all of society," said Rep. Benjamin L. Cardin, a Baltimore Democrat on the House Ways and Means Committee who recently voted for a $1.25-a-pack increase in the federal tobacco tax.

But Congress' near-unanimity that tobacco must be taxed more -- and taxed hard -- raises some troubling questions.

For example, a tobacco tax is one of the most regressive taxes possible, with the poor paying a disproportionate amount. Another problem is that smokers may already be paying -- or at least be close to paying -- their economic cost to society, so a new tax would unfairly single out smokers to pay for programs that benefit all Americans.

More fundamentally, a 75-cent tobacco tax may not be as effective as advertised in its two main goals: raising money and discouraging smoking. While a tobacco tax does cut smoking, policy experts believe that only draconian taxes really slice into smoking rates. And any decrease that does take place will cut projected tax revenues, leaving less than expected for health care programs.

Indeed, tobacco contributes up to $100 billion to the U.S. economy. Although eliminating tobacco might be a long-term benefit to society, it would also cause gaping holes in many state and local budgets, an issue that the government has not yet begun to address.

On top of these policy problems is a more basic question: Is Washington, through its taxes, anti-tobacco rhetoric and barrage studies on smoking's evils, setting the stage for a new round of de facto prohibition?

"I think there is a concern that we're trying to do something [ban tobacco] indirectly that we're not willing to do directly. We shouldn't do through taxation what we are not willing to do outright," Representative Cardin said. "We have to be very careful."

Whatever the merits of the tobacco tax, most public policy analysts see it failing its primary task of raising revenues for two main reasons.

First, it is not indexed to inflation. This means that, as time goes by, the tax will provide health care with less and less buying power. Second, the tax's long-term effect is also whittled away by the presumed decline in smoking that will result from higher taxes.

Taken together, the Congressional Research Service estimates that after six years the 75-cent tax will bring in an adjusted 62 cents, putting a $1 billion hole in health care and requiring new taxes.

On top of that, the tax is widely recognized as unfair. It imposes 3.6 times the burden on poor people as on average income-earners. Not only do the poor smoke more than the rich, but smoking is a relatively fixed cost, so it eats up a larger percentage of a poor person's budget than a rich person's.

Another concern is that a tobacco tax violates a tenet of public policy: fairness. Dr. Philip Cook, an economist at Duke University who specializes in excise taxes, said taxation should not make a minority pay for a program that is supposed to benefit all Americans.

"Generally you want programs that benefit all of society to be borne by as broad a cross-section as possible. The tobacco tax does not do that," Dr. Cook said.

Besides burdening one group in society, the tax is expected to put a hole in state budgets. Federal and state governments rely on tobacco for $39 billion in tax revenue. If the federal tax &L reduces smoking as advertised, state governments will see an immediate $1 billion shortfall in their revenues, according to the Congressional Research Service.

Economists caution, however, that it would be unrealistic to overplay tobacco's tax contributions. Even if tobacco were to disappear because of government pressure, it would do so over a long period of time and not have a cataclysmic impact on the national economy.

Top estimate for tobacco's contribution to the U.S. economy, for example, is $100 billion, compared with the $5.2 trillion in goods and services produced here each year. On the very outside, tobacco accounts for less than 2 percent of the total economy.

And many economists argue that the $100 billion figure is inflated because it includes the wages and benefits of shopkeepers who sell tobacco. Several economic models show that these shopkeepers would probably be able to sell other goods if tobacco disappeared.

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