Federal tobacco tax hike will do more harm than good

The current spending package being spearheaded by congressional Democrats could be a truly transformational achievement, solving many of the systemic and near-term problems facing the American people.

However, many of this bill’s benefits could be entirely counteracted if lawmakers include a provision called the Tobacco Tax Equity Act.

This bill, first introduced last spring, has flown largely under the radar, but if it passes in the reconciliation bill, it will punish low-income Americans, shutter small businesses and encourage a new wave of criminal activity.

The Tobacco Tax Equity Act would double the federal excise tax that consumers pay to purchase tobacco products, adjust it to inflation and tax non-combustible cigarette alternatives — like vaping devices — at the same rate as traditional cigarettes.

It’s intended to promote smoking cessation, particularly among minors, but if you take a look, it’s clear that there’s a significant gap between the bill’s intentions and its eventual outcomes.

For starters, this provision would violate President Biden’s campaign promise not to raise taxes on people making under $400,000 a year. Excise taxes are by nature regressive, meaning lower-income Americans pay a heavier share of their income because the tax is charged at the point of sale.

Because lower-income Americans are significantly more likely to smoke than higher earners, raising the tobacco excise tax would be primarily a tax on the poor. In fact, the Tax Foundation found that “the burden of the proposed cigarette tax hike on the lowest-earning 20% of households is 37 times heavier than it would be if the government raised the money with the federal income tax.”

Making matters worse, this proposal would also target small businesses still struggling to recover from the pandemic. According to the American Lung Association, convenience stores get more than a third of their revenue from tobacco sales.

Hiking the excise tax would drive down sales, stripping these businesses of critical revenue and potentially forcing them to cut jobs or shutter altogether. The economic impacts of this would entirely counteract any revenue the government raises from the increased tax.

Some people may say that driving down tobacco sales is the idea, but here’s the thing: Just because people will be less inclined to buy tobacco products from a legal market doesn’t mean they won’t buy them at all.

Nicotine is an addictive substance, so simply making tobacco more expensive won’t stop people from wanting to smoke. Criminal enterprises and gangs will inevitably swoop in to sell cheaper products on the illicit market — which already happens in high-tax jurisdictions.

In New York City, which has some of the highest taxes on tobacco in the nation, it is estimated that as much as 80% of cigarettes sold are illegally sourced. If the federal excise tax on tobacco is raised, then New York’s problem will become everyone’s problem.

Finally, this proposal would actually make it harder for people to quit smoking.

Non-combustible smoking alternatives, like vaping devices, are as much as 95% less harmful than traditional cigarettes — which is why some governments, like the UK, actually encourage smokers to switch to these alternatives.

The Tobacco Tax Equity Act would tax these products the same as combustibles, rather than taxing them based on relative harm, meaning there would be little financial incentive for smokers to switch.

President Biden’s reconciliation package has the potential to make incredible progress for a lot of people, but if they try to include the Tobacco Tax Equity Act as a pay-for, then much of that progress will be undone.

As Congress works to draft the budget reconciliation package, it is imperative that lawmakers stand with working Americans and small businesses and reject any federal excise tax increase on tobacco products.

Traci Nelson is president of the West Virginia Oil Marketers & Grocers Association.

Source: Wv News