Cigar Tax Up 6,000% to Pay for SCHIP

Matt Purple | Correspondent | Thursday, October 18, 2007

Cigar Tax Up 6,000% to Pay for SCHIP

( - The increase in federal tobacco taxes that congressional Democrats are proposing to fund their new healthcare initiative is being praised by anti-smoking advocates as an effective way to discourage tobacco sales.

"We are strongly in favor of the SCHIP proposal," Erika Sward, director of National Advocacy for the American Lung Association, told Cybercast News Service. "We see it as a win-win for children's health."

"The first win is that the cigarette tax will be increased by 61 cents, which will have a significant impact on youth smoking rates," she said. "And the other win is that millions of children, including those with lung disease, will be able to have health insurance as a result."

The tax hikes would include raising the federal cigarette tax from 39 cents to one dollar. Additionally, the tax cap on cigars would be raised from five cents to three dollars, a 6,000 percent increase.

The additional revenue would fund an expansion of the State Children's Health Insurance Plan (SCHIP), which Democrats want to increase by $50 billion over five years. The expanded program would provide state-funded healthcare for all Americans under the age of 25 from families with an annual income under $83,000.

Patrick Reynolds, executive director of the Foundation for a Smoke-Free America and grandson of tobacco magnate R.J. Reynolds, endorsed SCHIP and contended that the additional tobacco taxes could potentially save billions of dollars in healthcare costs every year by discouraging smoking.

"For every 10 percent increase in the price of a pack of cigarettes, there's a 7 percent decline in youth smoking and a 4 percent decline in adult smoking," Reynolds told Cybercast News Service. "And this serves everyone's healthcare costs."

Reynolds noted that complications and cancers developed from smoking drove healthcare costs up and added that all Americans could benefit financially from fewer smokers.

"The average medical cost per pack sold by some estimates is $2.17," he said. "I've also heard a recent estimate closer to $10. So the medical costs are just huge. There's money down the road to be saved on healthcare costs for sure."

But Dr. Michael Siegel, a professor at the Boston University School for Public Health, argued that tobacco taxes were not the most effective way to fund SCHIP.

"I don't dispute the idea that increasing the cigarette tax will reduce smoking," he told Cybercast News Service. "I don't think there's any question about that. But it doesn't make sense to me to permanently tie the financial solvency of children's health insurance to the need to continually increase the number of smokers."

"It's the most politically expedient solution," he said. "Clearly, to expand the program, you've got to get the revenue from somewhere, and I think that this is just the most politically easy target, because it's popular to go after smokers."

President Bush vetoed the SCHIP legislation at the beginning of the month, a veto that congressional Democrats want to override this week.

More smokers needed

In addition to concerns about overly penalizing smokers, many conservatives are worried that the tobacco tax increase would not sufficiently fund SCHIP.

A Heritage Foundation study released in July found that the tax hikes would lead to a reduction in tobacco sales, and thus the healthcare program could not be sufficiently funded. To keep up, "policymakers will somehow need to recruit new smokers."

"In just five years, Congress will need over 9 million new smokers" to fund SCHIP, according to the study. "Reauthorizing the program for 2013 to 2017 would require almost 22.4 million new smokers by the end of that period."

But Reynolds disagreed, pointing to state tobacco taxes that, he said, had diminished smoking while still remaining viable sources of revenue.

"43 states have raised cigarette taxes some 75 times since 2002," he said. "So the point is some states are raising cigarette taxes twice a year because they are such a win-win-win. If the revenue goes down, you increase it again."

Dr. Siegel disagreed, explaining that tobacco taxes were effective when used to fund anti-smoking prevention programs, for which the need would diminish as the number of smokers decreased. But to fund a federal healthcare program, Congress was better off using another tax, he said.

"This is a situation where you're advocating a specific amount of money to a program based on cigarette revenue," he said. "So if that cigarette revenue falls, by definition, the revenue available to the program is going to fall."

Many opposed to SCHIP have also asserted that the tobacco tax would disproportionately affect the poor, who purchase more cigarettes than the wealthy.

According to a July 2007 study by the Tax Foundation, the current plan would result in an average $249 tax increase for households in the bottom 20 percent income bracket. By contrast, the average household in the top 20 percent would pay only $7 more in taxes.

But Reynolds said the ultimate goal was to cause the number of smokers to taper off, regardless of their income bracket.

"I say increase [the tobacco tax] as high as it needs to go until we have a lot less smoking and the kids' health insurance is paid for," he said.

Cig industry collapse?

Perhaps the hardest hit by the new tobacco tax will be cigar companies. While the federal tax on cigarettes would go up 320 percent, the stogie industry faces a 6,000 percent increase of the federal cigar tax cap. Additionally, the tax rate on wholesale cigars would be bumped from 21 percent of the price to 53 percent.

Last month, the Corona Cigar company issued a press release expressing alarm at the new tax rates and advising consumers to brace for enormous price increases.

"Get ready for a $100 box of Macanudos to go to $180," Corona warned. "A box of Punch Rothschilds to go from $110 a box to $170. And this is a BEST CASE SCENARIO. ... If you live in a state that also has a state cigar tax, you better hold on to your wallets because the price of your cigars may triple."

"[U]nless every one of you doesn't mind paying 53% more for your cigars, the cigar industry is facing a total collapse," stated Corona.

Cigars have historically been taxed less than cigarettes, though a cigar tax is likely seen as politically viable because they are generally enjoyed by wealthier consumers. The average smoker also buys cigars much more occasionally than cigarettes.

Reynolds contended that the hefty cigar prices are long overdue.

"I think the cigar industry has gotten a free ride for decades, and it's time they started paying their fair share in tobacco taxes," he said.