2009-05-18 01:45:03 - The Senate Finance Committee is being urged to raise the federal tax on cigarettes to help fund health care reform, a proposal being described as a win-win-win proposition by Action on Smoking and Health (ASH), America's first antismoking organization.

Increasing the current cigarette tax would raise tens of billions of additional dollars to help fund health care reform. It would in addition slash health care costs by substantially reducing the major preventable cause of health care spending.

Finally, it's also one of the few taxes overwhelmingly supported by most voters; in part because - unlike an increased income tax,

new taxation of health benefits, a gasoline tax, etc. - it can easily be avoided simply by quitting.

"That's why it's a win-win-win deal for Congress, and more in the nature of a 'user fee' than a 'tax' because it is designed to recoup a small portion of the almost $200 billion smoking costs the American economy each year, most of which is paid by nonsmokers in the form of higher taxes (to cover Medicaid, Medicare, Veterans’ benefits, Indian benefits, MCH, and many other benefit programs), but also as grossly and unnecessarily inflated rates for medical insurance," says ASH.

Smoking costs the Medicaid program over $30 billion a year, compared with less than $7.5 billion in annual cigarette tax revenue, and each pack of cigarettes which is sold cost the U.S. economy over $10.25, says public interest law professor John Banzhaf, Executive Director of ASH. That's why it's only fair to make smokers pay more of their fair share of the costs smoking imposes on America's health care system, argues ASH.

ASH suggests that the U.S. tax on cigarettes should be raised to levels consistent with both U.S. historical standards AND with generally accepted world norms.

ASH notes that federal cigarette tax accounted for almost 33% of the average total retail price of cigarettes in 1960, long before there was any public understanding of the health dangers and increased medical care costs caused by smoking. Today the tax is barely 20% of the total retail price.

If the tax had been increased to reflect inflation, it would be at least 50 cents higher than the current rate, and even more if it were raised to reflect the growing price of cigarettes.

ASH also pointed out that the current tax is very low compared with generally accepted world norms. In most countries, federal taxes account for over 70% of the price of cigarettes, whereas in the U.S. the rate is barely 20%. In the European Union, cigarettes taxes range from more than $2/pack to almost $10/pack

Thus ASH argued: "A U.S. tax on a product which is so much lower than generally accepted international norms would seem to be justified only if we really wanted to substantially increase consumption and production. Since we really want to discourage it - not only to save lives, but also to reduce health care costs - this current very low tax rate is inexplicable as well as unjustified."

"In an increasingly international market, it is hard to justify a tax on U.S. cigarettes which is so much lower than that in virtually all other countries, either as a tax rate or as a percentage of the retail price. Indeed, a U.S. tax on a product which is so much lower than generally accepted international norms would seem to be justified only if we really wanted to substantially increase consumption and production. Since we want to discourage it - not only to save lives, but also to reduce health care costs - this current very low tax rate is inexplicable as well as unjustified."

Action on Smoking and Health is America's first antismoking and nonsmokers' rights organization, and the one largely responsible for banning cigarette commercials, triggering the use of legal actions against tobacco companies, banning smoking on airlines and public places, etc.

PROFESSOR JOHN F. BANZHAF III
Professor of Public Interest Law, and Executive Director of
Action on Smoking and Health (ASH)
2013 H Street, NW, Washington, DC 20006, USA
(202) 659-4310 // ash.org/

A COPY OF ASH'S LETTER TO MEMBERS OF THE SENATE FINANCE COMMITTEE APPEARS BELOW:

The Honorable *, Member
Senate Finance Committee
U.S. Senate
Washington, DC

RE: Why the Federal Cigarette Tax Should be Increased to Help Fund Health Care Reform

Dear Senator *:

Action on Smoking and Health (ASH), America’s first antismoking organization, very strongly suggests that the Senate Finance Committee BOTH help fund health care reform AND slash overall health care costs by substantially increasing the current federal tax on cigarettes [$1/pack] to levels consistent with both U.S. historical standards AND generally accepted world norms.

This tax, one of the few which enjoys very widespread public support, is also one of the few which would not only raise badly needed revenue, but also reduce the overall cost of the health care by imposing individual responsibility on those who continue to recklessly endanger their own health, and thereby impose these totally unnecessary health care costs (as well as other costs) on all taxpayers.

* THE CURRENT TAX IS VERY LOW BY U.S. HISTORICAL BENCHMARKS: In 1960, even before there was any public understanding of the health dangers and increased medical care costs caused by smoking, the federal cigarette tax of 8¢/pack accounted for almost 33% of the average total retail price.

But, because the federal cigarette tax was not indexed for inflation, and because Congress rarely raised it, that tax now accounts – even with the recent increase to help fund the State Children's Health Insurance Program (SCHIP) – for barely 20% of the total retail price, and only a small fraction of the cost smoking imposes on the U.S. economy, most of which is paid by nonsmokers in the form of higher taxes and health insurance premiums.

Another way to compare today’s tax with the cigarette tax in 1960 is to note how it has fallen so far behind inflation, even as most other taxes have kept pace. If the federal cigarette excise tax had just kept pace with the Consumer Price Index for tobacco products, it would be $1.51 today – 51¢ higher than it actually is. In short, Congress’s failure to raise the tax to keep pace either with inflation, or with the very rapidly increasing price of cigarettes, has made it easier for manufacturers to continue to raise prices, and to remain more profitable than other products which are forced to bear a reasonable tax burden.

* THE CURRENT TAX IS VERY LOW BY GENERALLY ACCEPTED WORLD NORMS: In virtually all other countries, federal cigarette taxes account for over 70% of the price of cigarettes. This is true whether the retail prices for 20 cigarettes are much higher than in the U.S. (e.g., Ireland, $11.70, 79%; UK, $8.50, 77%; France, $7.62, 80%; Germany, $6.80, 76%) or much lower in poorer countries (e.g., Poland, $2.00, 94%; Lithuania, $2.08, 68%; Bulgaria, $2.13, 86%; Romania, $2.32, 72%).

Perhaps the very best comparison is with the countries of the European Union. There, cigarettes taxes range from more than $2/pack to almost $10/pack.

In an increasingly international market, it is hard to justify a tax on U.S. cigarettes which is so much lower than that in virtually all other countries, either as a tax rate or as a percentage of the retail price.

Indeed, a U.S. tax on a product which is so much lower than generally accepted international norms would seem to be justified only if we really wanted to substantially increase consumption and production. Since we want to discourage it – not only to save lives, but also to reduce health care costs – this current very low tax rate is inexplicable as well as unjustified.

* There are Many Other Justifications and Arguments: Each pack of cigarettes which is sold cost the U.S. economy over $10.25 – most of which is paid by nonsmokers in the form not only of higher taxes (to cover Medicaid, Medicare, Veterans’ benefits, Indian benefits, MCH, and many other benefit programs), but also as grossly and unnecessarily inflated rates for medical insurance.

Smoking costs the Medicaid program over $30 billion a year, compared with less than $7.5 billion in annual cigarette tax revenue.

It was reliably estimated that the recent 61¢ federal tax increase will save 900,000 lives annually, bring in almost $10 billion in increased revenue, decrease smoking by children by almost 10%, help persuade over 1 million current smokers to quit, and save about $1 billion in 5-year health-care savings alone.

A substantial additional tax increase would produce even larger proportional savings in lives and taxpayer dollars. No other tax provides anything like these benefits. Indeed, the prestigious and impartial National Academy of Sciences found that tax increases were far more effective than limitations on cigarette advertising and promotion, or antismoking campaigns, in reducing teen consumption of cigarettes.

Although some have argued that the tax is regressive, the Congressional Budget Office concluded that "excise taxes may not burden lower-income families as much as they appear to. . . . Measured as a percentage of total family expenditures, excise taxes are nearly the same for low-, middle-, and high-income families." Indeed, about 60% of smokers have incomes over 200% of the poverty level, 23% have incomes between 100% and 200% of that line, and only 17% have incomes which are lower than the poverty level.

In any event, the primary beneficiaries of a tax increase on cigarettes are the poor people who will be most encouraged to quit smoking (and thereby live longer and healthier lives), as well as their spouses and children (who will no longer face the premature and painful death of a loved one), and who also will not be involuntarily subjected to carcinogenic secondhand tobacco smoke – estimated to cause over 50,000 additional totally unnecessary deaths each and every year. The tax (like other user fees) is also totally avoidable, simply by quitting.

* THE TOBACCO INDUSTRY’S ARGUMENTS MAKE LITTLE SENSE: While it is true (and a major argument in its favor) that the increase will reduce sales (especially to children), the percentage decline will be more than made up by the percentage increase in price, with a resulting overall increase in revenue to help fund health care.

A national increase in tax will not increase the incentive to smuggle, since the difference in prices between high-tax and low-tax states will obviously be the same amount, but now a smaller percentage of the total price.

Also, since even larger increases in cigarette taxes in many states over the past several years have not caused noticeable job losses, much less “devastating” ones, this pro-tobacco argument is largely fear mongering. Similarly, since even larger state tax increases caused no significant increase in crimes, this appeal to fear is likewise a largely empty threat – and neither pro-tobacco claim is supported by any hard data.

Finally, President Obama’s promise not to increase taxes on lower and middle class taxpayers was obviously made in the context of an income tax, a tax which individuals cannot avoid. But poor and middle class Americans can – and should – avoid this cigarette tax increase simply by quitting smoking, something they cannot similarly do with an increased income tax, new taxation of health benefits, a gasoline tax, etc.

Please feel free to contact me if my organization can be of any further assistance regarding this matter.

Yours truly,


Professor John F. Banzhaf III
Executive Director and Chief Counsel