Obama’s Cigarette Tax Will Hurt the Poor While Enriching Politicians’ Friends

CNN is reporting that President Obama wants to raise federal cigarette taxes by 94 cents per pack:

The tax is being presented as way to fund education and reduce smoking rates. It would raise roughly $78 billion over 10 years.

“The proposed tobacco tax increase would have substantial public health benefits, particularly for young Americans,” the president’s budget read. “Researchers have found that raising taxes on cigarettes significantly reduces consumption, with especially large effects on youth smoking.”

After a 62-cent-a-pack tax hike was passed in 2009, cigarette sales dropped by 10%, according to the Campaign for Tobacco-Free Kids.

The tax is being sold as a way to help the poor, with the revenue supposedly going to early childhood education programs. But if the results of state cigarette taxes are any indication, the tax will disproportionately hurt the poor, fund programs directly connected to politicians and negatively impact small businesses, all while consistently failing to meet revenue goals.

Cigarette taxes hurt the poor

Cigarette taxes are extremely regressive. The poor pay a larger chunk of their income to the tax than the wealthy. This is further exacerbated by the fact that low-income, low-education and minority populations all smoke more than high-income, high-education and white populations, and by a good bit. Nearly a third of people below the poverty line smoke, while only 18% of those at or above the poverty line do. A tax on cigarettes is therefore paid mostly by society’s poorest individuals.

Cigarette tax revenue goes to politicians’ friends

In theory the revenue from cigarette taxes helps low-income populations by xyz. But as Reason’s Adrian Moore has pointed out, in reality bureaucrats often use it to fund projects their friends run.

In California, a cigarette tax was supposed to fund health, safety and educational programs for children. Instead, a San Diego county commission spent at least $67 million of that money to help ensure the continued employment of members of their advisory board. Almost 60% of early childhood grants went to organizations with direct ties to the commission. Another California commission used cigarette tax dollars to overpay a contractor by over a half million dollars. Then $800 million just sat around:

Supervisor Zev Yaroslavsky said First 5 LA was sitting on hundreds of millions of dollars of unspent taxpayer funds, and criticized the staff for a lack of transparency, accountability and competitive bidding.

“It’s sitting on over $800 million,” Yaroslavsky said. “And some of it for good reason, and some of it for no apparent good reason. It’s just been sitting there and accumulating.” First 5 LA’s annual operating budget is about $180 million a year.

An audit by Harvey M. Rose of San Francisco found First 5 LA’s commission was unable to monitor money that was being spent “since monthly programmatic expenditures are not presented relative to a budget.” Auditors also concluded the agency was overstaffed while under-spending on programs for children.

Cigarette taxes don’t raise much revenue

Not only are cigarette taxes regressive, but they often fail to meet their revenue estimates. Reason’s Anthony Randazzo notes “revenue from Gov. Pawlenty’s 2005 tax increase was estimated to generate $174 million per year, but Minnesota’s cigarette tax revenue has only increased by an average of $4 million per year-a paltry 2.72 percent of the estimate.”

Similarly, a 2008 Maryland cigarette tax increase only yielded half the projected additional revenue.

This Mackinac Center for Public Policy study shows the states which are top destinations for smuggled cigarettes:

  1. New Jersey
  2. New York
  3. Vermont
  4. Massachusetts
  5. Connecticut

The Mackinac Center also reports that more than 40 percent of the cigarettes smoked in Rhode Island are purchased on the black market or in other states. That represents a huge loss of revenue to state government and local businesses. In the face of the data, many states are cutting their cigarette taxes.

Taking money from poor people, hurting state businesses, filtering it through bureaucrats who are likely to waste it and funnel it toward connected organizations, and then cutting those programs that do get funded when sales decrease didn’t make sense for states and it doesn’t make any more sense on a national level.