Is the tobacco tax smoke and mirrors?

Almost certainly, some people would be physically healthier. But the impact on the nation's fiscal health is murkier.

By InvestorPlace Feb 11, 2010 1:20PM

Man holding cigarette © Ben + Marcos Welsh/AGE FotostockBy Paul Ausick


A recent survey by International Communications Research found that 60% of Americans would support a tax increase of $1 per pack on cigarettes, preferring it to both budget cuts or other tax increases. The increased tobacco tax would raise more than $9 billion for the federal government.


Let's see -- the federal deficit projection for 2011 is $1.35 trillion. So a higher tobacco tax would reduce the deficit by about 0.07%. That's not even a rounding error.


There are, of course, some very good reasons to increase the tobacco tax.


Globally, smoking is the leading cause of preventable diseases such as heart disease, cancer and lung disease according to the World Health Organization.


The cost of smoking to the U.S. health care system is estimated at $96 billion annually, so any reduction in the number of smokers could also reduce that spending. The total U.S. health care bill in 2008 was $2.3 trillion, and that is expected to go up by 5.7% for 2009, totaling more than 17% of U.S. GDP. Smoking accounts for about 4% of the U.S. health care bill, not insignificant, but probably not the first place we should look to for savings.


Higher taxes on tobacco have been effective in getting adults to quit smoking. The Cancer Action Network reports that a 10% increase in tobacco taxes reduces total consumption of tobacco by 4%.


A tobacco tax hike can also generate a lot more income. In 2007, Texas raised its cigarette tax by $1 per pack, and nearly tripled receipts even though cigarette sales dropped by 21%.


The burden of both cigarette taxes and higher incidence of disease falls mainly on the poor and the less-educated. The addictive nature of nicotine puts a very high opportunity cost on tobacco. Money spent on tobacco is not available for food, clothing and other necessities.


Taxing tobacco makes sense from a public health point of view but far less sense as a way to raise revenue. The same is true with liquor taxes, another popular way for government to raise revenue.


Finally, the federal government is considering adding a new sin to the list: soda pop. A tax on sugared drinks was proposed last year that would raise about $5 billion a year and reduce consumption of sugared beverages by 23%.


The bill appeared headed for passage until the beverage industry decided to step up to the bar. Coca-Cola (KO), PepsiCo (PEP) and the American Beverage Association spent a combined $37.5 million in 2009 to lobby against the bill. Now it appears that the sugar tax has no chance of passage, even though the link between sugared beverages and obesity is well-established.


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