The 1997 Budget Deal - What It Means to Taxpayers

Policy Backgrounders | Taxes

No. 144
Wednesday, February 04, 1998
by Bruce Bartlett

Airlines and Cigarettes

The primary revenue increase in the tax bill was an extension of the airline ticket tax, with several modifications. The rate was reduced from 10 percent to 9 percent and will decline to 7.5 percent in 1999. To offset the revenue loss, the bill imposes a new tax of $1 on each domestic flight segment, rising to $3 in 2002. The international departure tax was raised from $6 to $12 per passenger and made applicable to arrivals as well. The effect of the changes is to make the airline tax somewhat more regressive. Passengers flying first class or paying full fares will pay less, while passengers flying coach or on discount tickets will pay more. Heavy lobbying by the nation's seven largest airlines in an effort to improve their competitive position vis-à-vis the growing number of discount airlines apparently brought about the change.39

Figure III - Share of Cigarette Taxes Paid by Income Group

"First class and full fare passengers will pay less, while coach and discount passengers will pay more."

The other major revenue raiser was an increase in the cigarette tax from 24 cents per pack to 39 cents. Though not originally part of the budget agreement, the provision was added following announcement of the tobacco industry's decision to settle myriad lawsuits by paying $368 billion. The settlement greatly eroded the tobacco industry's ability to forestall cigarette tax increases through lobbying and political contributions. With smoking and the tobacco industry under political assault, a cigarette tax increase was simply an expedient way to raise revenue and offset tax cuts.

It is ironic, given the heated debate over the distribution of the tax package's benefits to people at various income levels, that the highly regressive increase in the cigarette tax passed almost without debate. A study by KPMG Peat Marwick found that families making less than $30,000 per year pay more than half of all cigarette taxes - a tax burden almost five times more as a percentage of income than that on families earning over $60,000 [see Figure III]. According to a more recent Tax Foundation analysis, those with AGIs under $15,000 will pay 34 percent of the tax increase and those with incomes under $30,000 will pay 60 percent.40 This is consistent with research showing that the incidence of smoking rises as incomes fall.41

The ease with which Congress was able to increase the cigarette tax by more than 60 percent, almost as an afterthought, suggests that larger increases will come. There are a number of proposals to increase cigarette taxes to recoup the costs smokers impose on society, such as increased expenditures to treat smoking-related diseases. But the truth is that smokers already pay their own way. After adjusting for inflation, the direct cost of smoking - 21 cents per pack in 1995 dollars - falls well below the 1995 average total of 63 cents per pack in federal and state taxes. Since smokers overpay their incremental costs, an additional tax is unfair.42

Higher cigarette taxes are strongly promoted on health grounds, but the morality of using large increases in "sin taxes" to punish legal but socially opprobrious behavior is questionable.43

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