Schip – right program / wrong funding?

It probably wouldn’t have made a difference which presidential candidate was elected to the outcome of the proposed Schip legislation, which Congress is expected to resurrect soon in 2009.

For those who are unfamiliar, Schip is a Federal government program aimed at providing health care for children below the poverty line. A worthy cause and one well deserving of a solution – but is funding Schip by increasing the federal excise tax on cigarettes the right (solution) fiscal policy?

Federal Excise tax (FET) is $0.395 cents a pack and the proposal will increase it to $1 – adding $0.605 – making it $10 a carton. Estimates vary, but the net effect will be a decrease in cigarette consumption of about 10% – or 35 billion cigarettes a year for a couple of years as consumers become re-accustomed to the new price level. At 350 billion cigarettes, FET could rise to $350 billion (from $138.25) although the net increase is $176.75 billion ($315 – $138.25 billion – assuming US smoking levels decline as expected.) This is by no means certain and makes Schip funding uncertain.

Smoking prevalence is directly related to price and real disposable income; higher prices / lower consumption. Future State and local tax increases will undermine Schip funding as will the adverse economy – eroding disposable incomes. Remember too the volume decline is only an estimate.

There are better ways to fund Schip. Perhaps more pertinent is the entire question of health care reform and if the federal government should be removed from the obligation – while still solving health care for all children?

29 comments ↓

#1 Gamblingman on 12.04.08 at 12:02 AM

Very interesting thoughts here but it’s a case of doing good by affecting the minimum, however the collateral damage is never a part of the equation. Political correctness interestinly enough develops strange bedfellows. Ex – Philip Morris, CTFK, Waxman & Kennedy.

#2 EX WS on 12.05.08 at 10:44 AM

I’ve been hearing the new SCHIP legislation possibly is looking at a $1.00 per pack increase in the FET. It’s pretty obvious Waxman needs to do some economics as this would be so ill advised.

#3 Bill Godshall on 12.05.08 at 5:01 PM

I won’t be surprised if the SCHIP legislation introduced next year increases the FET on cigarettes by a $1/pack instead of $.61/pack (with similar % increases in the FET for other tobacco products). And if that occurs, it is highly likely to become enacted.

I also anticipate that federal healthcare reform legislation introduced next year would further increase the FET (by another $1-$2/pack for cigarettes, with similar percentage increases in other tobacco taxes).

Furthermore, many states are likely to increase state cigarette tax rates in the next six months. In just the past few weeks, cigarette tax hikes have been proposed in FL, OR, KY, MS, UT, VA, NC, SC, AR.

If/when these cigarette tax rates increase, even more smokers will begin using far less hazardous (and less expensive) smokefree tobacco products as alternatives to cigarettes.

2009 could become the first year that nationwide cigarette consumption declines by more than 5%, and the first year that smokefree tobacco sales/consumption increases by more than 10%.

#4 EX WS on 12.06.08 at 12:03 PM

Bill – you increase the fet by a $1.00 a pack and a 5% increase is grossly understating the decline especially when the declines are already approaching that number!
As stated before it’s obvious that Waxman and his crew need to get out the old calculator that works and do a little arithmetic as they will be looking for funds that will be missing. I mean all they have to do is look at the recent development in Maryland where the legislature and finance guys are looking at each and going oh shit what do we do now!

#5 jancascade on 12.07.08 at 10:48 PM

Tobacco is an easy target, but the states end up on the losing end everytime they increase the cigarette taxes. Oregon is scratching its’ head trying to figure out why their tobacco taxes were down $22 M last quarter. That is a huge decline and I expect it to continue. Smokers have been going to the Internet and black market for years. They now have an alternative and are using it, snus and the e-cigarette. Lowers taxes on snus and no taxes on the e-cigarette.

This what the states wanted less people smoking. Now they have it they don’t know where to turn for more taxes. Raise the taxes and see greater smoking declines.

The states MSA payments will continue to decline but they still have to pay those bonds they sold their share for in some cases, pennies on the dollar. Fools.

#6 TAZ on 12.08.08 at 12:37 AM

Here’s info from Colorado – Would seem to support the two previous entries regarding increasing of taxes equaling less tax revenue!

After Colorado raised cigarette taxes by 64 cents per pack, from 20 cents to 84 cents per pack in 2004, adult smoking rates dropped from 20% in 2004 to 18.7% in 2007, but budget forecasts show that tax revenues will likely decline from $169.6 million in the first year to $135.5 million in fiscal year 2011-12, according to a report in the daily Rocky Mountain News. (Rocky Mountain News 12/03)

#7 Bill Godshall on 12.08.08 at 1:22 PM

I agree with EX WS that a $1/pack FET increase will reduce cigarette consumption nationwide by at least another 5% (perhaps by as much as 10%).

But any FET increase is unlikely to go into effect before the spring (or perhaps summer) of 2009, and the FET increase might be phased in (that’s what cigarette companies want). So its impact on cigarette consumption is likely to be spread over 2009 and 2010.

Regarding Taz’s posting on Colorado’s cigarette tax, according to the Tax Burden on Tobacco, 276 million packs of cigarette were sold in CO in 2004, generating $53 million in state tax revenue. Also, 247 million packs were sold in 2006, generating $206 milion in CO state tax revenue, and 242 million packs of cigarattes were sold in 2007, generating $202 million in state tax revenue.

Regardless, smoking prevalance data is not an accurate or reliable indicator of cigarette consumption. For example, while 20% of American adults are “current cigarette smokers”, only 15% of American adults are “daily cigarette smokers”. So about three fourths of cigarette smokers (i.e. daily smokers) consume 98%-99% of all cigarettes, while about one fourth of cigarette smokers (i.e. occassional smokers) consume just 1% – 2% of all cigarettes.

Regarding black market cigarettes, several years ago, Forrestor estimated that 6% of cigarettes sold in the US were either counterfeit, smuggled and/or tax evaded. I suspect that estimate is pretty close (although it is higher in states with the highest cigarette tax rates including NY, NJ, MA).

#8 jancascade on 12.08.08 at 7:58 PM

Society needs to pick its’ poison. The money spent on anti tobacco efforts far outweighs the cost of tobacco. The states have been on the bandwagon, funding anti tobacco efforts with their excise tax revenue that could have gone to real health care, schools and other necessary state services.

The states will not ban tobacco sales and use, they need the money, so why not let the anti tobacco messengers spend their own money on their message and put those funds back into the General Fund?

They increase taxes and promote smoking bans that cost them revenue, then try to figure out how to do more with less.

It makes no sense. Maybe it is just me, I’m tired to death of governments good intentions!

#9 Bill Godshall on 12.09.08 at 1:00 PM

Per jancascade’s posting, all states combined have spent $6.5 billion (3.2% of tobacco settlement funds) on tobacco prevention and cessation programs. And I think California and Florida are the only states that dedicate a portion ($.05/pack) of cigarette tax revenue to tobacco prevention and cessation programs, about another $100 million/year.

Meanwhile, the cost to treat smoking diseases and disabilities in the US has been increasing at double the rate of inflation for the past 25 years, and is now about $150 billion annually (with federal, state and local government expenditures accounting for 60%-65% of those healthcare costs).

But while state spending on tobacco prevention and cessation programs are a drop in the bucket (compared to healthcare costs due to smoking), most state run tobacco prevention and cessation programs have not been very (if at all) cost effective at preventing or reducing smoking.

A few years ago, officials in NY State and NYC addressed both of these issues by sharply increasing cigarette tax rates (which reduced cigarette consumption and provided revenue for healthcare costs) while slashing the budgets of tobacco prevention and cessation programs.

#10 jancascade on 12.09.08 at 1:37 PM

Bill, I believe you misread my post. The states have certainly squandered the MSA funds. Imagine if the money they have received in the past ten years had been invested in a Rainy Day fund. I have seen our state raise taxes again and again, driving comsumers out of our stores. The retailer loses business and the loses revenue, anyway you look at it 65% of 0 is 0.

Before the ink was dry on the MSA documents, anyone who appeared before our legilsature and uttered the words smoking and children in the same sentence were granted wads of MSA cash to “save the children.” Yes, the funding has been cut back and needs to be cut off. The remaining (if there is any) needs to be invested for the states.

There are many, many non profit groups with billions of dollars in their endowment funds to fund the anti-tobacco message. Tobacco is a source of revenue for government and it is a foolish waste of taxpayer funds to advertise against the use of a legal product that government depends on for revenue.

Smokers have been paying excise taxes for years and years, none of it has gone for their own health care, but to fund other government programs and pay for health care for low income workers and for those who are not even legally in our country.

The rising cost of health care cannot be laid at the feet of smokers. The anti tobacco agenda has been going for forty years, fewer people are smoking – where are the the great health care saving they promised? Twenty percent of the population that smokes cannot be responsible to the ever increasing cost of health care. The just does not pencil out, people need to stop and think.

#11 Pam on 12.09.08 at 11:09 PM

Why don’t we just tax people $10 a year for each number of the anti-obesity lunatics’ BMI? Then, after everyone is the ideal non-smoking, non-drinking and now non-obese person, they can tax the next thing they want us to give up. Lunacy. You want to tax something you hope to tax out of existence. THEN who pays? Whose brilliant idea is this?

#12 Pam on 12.09.08 at 11:09 PM

sorry…each number OVER the BMI

#13 Long Islander on 12.10.08 at 12:56 AM

Pam – You need to realize that those in government are not rational! They are guided by special interests and are appealing to the majority for votes. I heard the other day folks in a restaurant talking about how Obama was going to give them free internet. I’m not picking on the man I hope he does well but free internet – nothing is free – someone has to pay for it! Lunacy runs rampant!

#14 jancascade on 12.10.08 at 1:00 AM

The Twinkie Tax was once a joke, but with healthism the new religion of the day I believe a “junk food” tax is on the agenda. Sometimes I feel like the nation is being run by former hall monitors and other misfits.

It is not about health, it is about money, power and control. I hate busibodies. They need to manage their own lives and leave others to manage their lives as they see fit.

#15 Troubadour on 12.10.08 at 12:43 PM

I was talking with a professional today and I found it interesting that Universities have special tax privileges. Wonder why they need help with tax advantages with the high price of education.

#16 jancascade on 12.10.08 at 2:08 PM

Troubadiur,
You should go visit guidestar.org and review the Form 990’s for universities. Some of the endowment funds are in the billions of dollars. These same universities pay a bevy of lobbyist to ply the halls of Congress seeking ever increasing student loan amounts so our young people can graduate with 20 yrs of student loan debt after attending the very endowment rich Ivy League schools. It is disgusting.

While you are there, take a look at any tax exempt foundation or tax exempt non profit. There are trillions of dollars in endowment funds, make them richer and more politically powerful. Many see their mission as setting health policy in this country rather than helping people in their time of need. These groups too pay a bevy of lobbyist to fund their missions and stuff the generous donation they receive from people into their endowment funds. The non profit sector makes the banking sector look innocent.

Sorry, this has long been an issue to me. They rake in billions every year, yet Congress says they only have to spend 5% to still be considered tax exempt.

#17 Bill Godshall on 12.10.08 at 4:26 PM

Regardless of one’s opinion, it appears increasingly likely that the biggest increase yet in the overall cigarette tax rate and in retail prices (in the US) will occur in 2009.

#18 jancascade on 12.10.08 at 4:44 PM

Sadly Bill you are probably right. It will end up driving this industry underground like New York and Canada.

The powers that be simply cannot grasp the fact that people are willing to pay a reasonable tax rate, but will not stand for government gouging them with taxes. There are always those willing to step in a fill a void. The risk and punishment for selling underground tobacco are not as severe as selling drugs. This is already happening and will just create a bigger more profitable market for the black market. The retailers lose, but happily, so does government for their own stupid actions.

#19 Bill Godshall on 12.10.08 at 5:56 PM

According to the Tax Burden on Tobacco, the combined federal and state cigarette tax rate (as a percentage of retail price) declined from 48.7% in 1954 to 34.8% in 2007.

And in sharp contrast to 1954, the cigarette tax rate (as a percentage of retail price) was below 50% in all 50 states in 2007.

#20 jancascade on 12.10.08 at 8:42 PM

Bill, where do those numbers come from? The smoking rate have dropped considerably since 1954. It makes no sense that with such a dramatic drop in smoking rates the “tax burden” (whatever that is) would be greater. Do you have the what made up the tax burden in 1954 and what constituted the “tax burden” in 2007. Are we comparing apples to apples?

Are these numbers actual scientific data or computer simulated data? You know what they say about computers, garbage in, garbage out. It like creative accounting.

#21 EX WS on 12.11.08 at 12:41 AM

Jan is this what your referring to in your above comments? Wow 48%!

Dave Bryans, president of the Canadian Convenience Stores Association and member of the National Coalition Against Contraband Tobacco, is urging the Federal government to establish a commission to crack down on contraband cigarette trade after a report released by the Ontario Auditor found that 48% of cigarettes sold in the Province is illegal, which deprives the government of C$ 500 million (US$ 399.4 mn) in tax revenues each year. (Canada Newswire 12/08)

#22 Bill Godshall on 12.11.08 at 3:12 PM

The Tax Burden on Tobacco (which was published for decades by the Tobacco Institute prior to that trade association’s shutdown by the 1998 MSA) relies upon upon tobacco industry data.

As a percentage of retail price, the combined federal and state cigarette excise tax rate fluctuated between 46%-51% from 1954 until 1973. Then it gradually fell throughout the 1970’s, 80’s and 90’s to a low of 22% in 1999. Since then, multiple state cigarette tax hikes have increased the cigarette tax rate to 34% in 2007.

Many people (especially smokers) incorrectly believe that cigarette tax rate is far higher now than it was 30, 40 or 50 years ago because the cigarette industry has spent lots of money on deceptive propaganda.

The huge decline in cigarette tax rates is due to inflation, as cigarettes are taxed by the pack, not as a percentage of price (as are most other types of taxation). By taxing them on a per pack basis, cigarette taxes must be increased every few years (to offset inflation) in order to maintain a steady tax rate (as a percentage of price).

#23 EX WS on 12.12.08 at 3:12 AM

Oh come on folks – a pack of cigs cost how much in 1954. I think the next time I’m in a Cracker Barrel I’ll look at those old signs! So how many times more does it cost for that pack of Lucky Strike today? How much have the taxes actually increased? Forget the percentages look at the actual dollars so we can see how our state and federal government mismanage funds. Plus tell me another product that is taxed dollar wise and % wise. There is no misperception Bill. The taxes are exceptionally higher. You continue to use your logic to protect the governments mismanagement of the revenue they steal from the people.

#24 jancascade on 12.13.08 at 10:23 PM

John Q. Smoking Public will vote with their dollars, they already have been. We will see more cigarettes sold out of the trunk of a car than the local C-store. The black market is huge in the high tax states and Canada.
It will only grow a legal retail shrinks. The states spend millions trying to catch tax cheats, they go audit the retailers because they know where to find them. They only catch the bad guys for some stupid traffic infraction.

We capped the Oregon premium cigar tax at fifty cents per cigar. This cap caused a huge revene increase here. Our legislators will not mess with that tax again, they are making too much money. Today we have five other states that took a look at Oregon’s cigar tax cap and followed suit. They to are enjoying higher revenue collections. Do we tax for revenue or to set some socialist agenda?

If government gives the people a fair and just tax rate, they pay it willingly, support local businesses and keep their dollars circulating in the local economy. When the states get greedy, they lose the support of the people, who will go out of their way to say to hell with this, I’m not paying that tax. The states end up chasing phantoms.

I keep wondering if we will ever see government leaders will common sense. The power to tax should not be used for social engineering and this nonesense has run its course.

#25 Top Seller on 12.29.08 at 4:28 PM

Tobacco Taxes are regressive in nature and our politicians (I wouldn’t call them all representatives, because most are only self-representative) need a history lesson and to start taxing other items that do not target (directly or indirectly) those without the economic fortitude to carry such a disproportionate tax burden. Frankly I feel the argument of health risk is antiquated seeing that virtually EVERYONE KNOWS that smoking ANYTHING is likely to cause health concerns over the long term.

#26 Top Seller on 12.29.08 at 4:31 PM

All of the above is interesting, and the only cause and effect relationships are as Taxes go up, consumption will go down, and as consumption goes down, taxes go up, and round and round we go, until they might just kill the golden goose

#27 DEERHUNTER on 12.29.08 at 4:42 PM

Been gone for a while but the only other thing I feel is of setriment is that the government just wants more control of its subjects.

#28 Smoker Gal on 01.10.09 at 10:42 PM

Top Seller your right I just hope it doesn’t happen in my lifetime.

#29 NYsmoker on 01.18.09 at 7:51 PM

they also what to increase the loose tobacco for rolling your own cigarettes to $24.60 LB. consumption will go down somewhat. I will now be growing my own. and i am sure there will be more who will grow there own

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