PJ Media

Obama's 2173%, Painfully Regressive Tax Increase

It was not an April Fools’ Day stunt, and it wasn’t funny.

On April 1, tobacco taxes went up — way up. The most visible increases were the roughly 160% hikes in the federal excise tax on cigarettes to $1.01 per pack from 39 cents, and chewing tobacco to 50 cents per pound from 19.5 cents.

The least visible increase was the most revealing one, because it showed just how far the government will go in search of tax revenue while protecting the very people it demonizes for public consumption.

You see, as state and federal tobacco taxes have risen over the years, more and more smokers have taken to rolling their own cigarettes and cigars. This of course requires purchasing the raw material. Until March 31, the tax on a pound of tobacco was $1.09. According to this retail source, you can get up to 600 cigarettes, or up to 30 packs, out of a pound.

You can see the “problem”: $1.09 is a lot less money for Uncle Sam than the up to $11.70 (30 packs times $0.39) he was extracting from regular smokers before April 1. I have little doubt that many inside the halls of government, probably with the helpful assistance of cigarette makers moaning about “unfair” competition, were characterizing the roll-your-own smokers (RYOs) as “freeloaders.”

So Congress and the president fixed that “unfair” situation by raising the per-pound tax on tobacco purchases from $1.09 to $24.78.

You read that right. That’s a mind-numbing 2173% tax increase. Now the federal tax on the raw material is pretty close to the federal tax charged on cigarettes at retail, which, equivalently stated, is now up to $30.30 (30 packs times $1.01).

In government-think, this was done, I suspect, to force the RYOs to pay “their fair share.” It shouldn’t surprise anyone if many states follow suit and impose their own per-pound tobacco tax increases.

Though they will never publicly admit it, Congress imposed this radical tax increase on RYOs to protect Big Tobacco, the tax cash cow they love to hate, but can’t live without. It’s as clear an illustration as you’ll ever see of how government all too often operates at cross purposes. On the one hand, it uses Big Tobacco as a whipping boy every time a study comes out showing some new harm or cost imposed by smoking and smokers. On the other hand, the government knows that if enough people ever stop smoking, or figure out how to get their nicotine fixes without going through Big Tobacco, tax receipts will dive.

The latest round of federal tobacco tax increases is supposed to fund the expansion of SCHIP, the State Children’s Health Insurance Program. There is no defensible reason, other than sheer vindictiveness, why a small minority of the population, the roughly one in five adults who smoke, should, as is supposedly the intent, pay for the entire multi-billion-dollar cost that was added to the program earlier this year.

(I say “supposedly” because many analysts, including Heritage, have concluded that the population of smokers would have to increase dramatically for the tax increases to fully fund SCHIP expansion. That clearly won’t happen and will set the stage for raiding “general revenues,” as if there really are any available, in the future.)

On top of all of that, the tobacco tax increases collectively represent about the most regressive tax imaginable.

Even if the prevalence of smoking in lower- and upper-income groups were the same, these taxes would represent a fixed cost slapped on everyone, including the poorest among us. But it’s worse than that, because smoking is more prevalent in lower-income groups. Last Wednesday, Gallup reported that the tobacco tax increases are “nearly three times as likely to affect low-income Americans as … high-income Americans. That’s because 34% of the lowest-income Americans smoke, compared with only 13% of those earning $90,000 or more per year.” Since there is no reason to believe that RYOs are any more or less prevalent among various income groups than smokers in general, the 2173% tax increase on raw tobacco purchases will hit affected lower-income RYO households even harder.

Yes, smokers can quit. Without doubt, many will. But the government can’t afford for everyone to quit. More importantly, it knows that most won’t.

In addition to being yet another clear case of theft from one group to benefit another — adult smokers will pay for the health care of mostly other people’s children — the tobacco tax increases represent a broken Obama campaign promise.

Candidate Obama said that 95% of Americans would have their taxes cut during his administration. The only way that could be the case is if every family with a household income under $250,000 a year with one or more smokers is able to get tax freebies from the Obama grab bag exceeding the additional tobacco taxes they will pay. Every pack-a-day smoker who will be paying $226 more in cigarette taxes per year (365 days times $0.62) would have to get an offsetting benefit from somewhere else. One problem is that many of Obama’s tax breaks phase out at incomes far below $250,000. But beyond that, a large plurality of taxpayers currently pays no federal tax. The only way to claim that these people are getting a “tax cut” offsetting the tobacco tax increases is to twist the definition of “tax cut” to include “government grants to non-taxpayers.” Further, even if you accept that nutty definitional extension, the New York Times reported on March 25 that “[neither] the House [nor] Senate [budget] plans … would extend a middle-class tax cut championed by Mr. Obama beyond 2010 unless a source of revenue to pay for it is identified.”

So at best, it appears that Obama’s middle-class “cuts” will give households a one-year break. But the painfully regressive tobacco tax increases will go on, and on, and on.

How Obama and his party retain their “friends of the little guy” status remains a mystery.