NCPA - National Center for Policy Analysis


August 4, 2009

The recent expansion of the State Children's Health Insurance Program (S-CHIP) was funded by an increase in federal excise taxes on tobacco products.  Congress increased the federal tax on cigarettes by 61 cents per pack and raised the tax on other tobacco products, with the goal of equalizing the tax per pound of tobacco.  Using tobacco tax increases to fund health care for low-income children is a bad idea.  As the taxes imposed on tobacco products increase, revenues are likely to fall -- requiring increases in other taxes.  In addition, small businesses and their employees are likely to suffer, and the impact on public health is likely to be negligible, or even negative, says David Weeks, a research assistant at the National Center for Policy Analysis.

According to the U.S. Department of Treasury, the resulting tax increase was much higher on some forms of tobacco:

  • For large cigars, the federal tax increased 725 percent per cigar, from about a nickel to 40 cents.
  • For loose tobacco, the tax increased 2,160 percent.
  • For small cigars, it increased 2,653 percent!

S-CHIP will now cover up to four million additional children in families that earn too much to qualify for Medicaid.  Unfortunately, there is plenty of evidence that not only will these tax hikes harm poor consumers and small businesses, they will fail to deliver the promised government revenues or public health benefits.  This means that Congress will likely have to raise other taxes to cover the $33 billion estimated annual cost of the S-CHIP expansion, explains Weeks.

Excise taxes are not a reliable source of revenue.  Because they are a fixed amount per unit, they must be increased in order to keep up with inflation.  On the other hand, sales, income and property tax revenues all rise with inflation and growth, says Weeks. 

Using excise taxes to fund S-CHIP is especially problematic, since the percentage of the population using tobacco products is shrinking, while the number of children eligible for S-CHIP coverage is growing.  According to Heritage Foundation projections, the federal government will need 22.4 million new smokers by 2017 to pay for the S-CHIP expansion. 

Source: David Weeks, "The New Federal Tobacco Tax: Who Loses?" National Center for Policy Analysis, Brief Analysis No. 670, July 4, 2009.

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