Federal and state governments look to smokers for more tax revenue

Though they hit poor Americans hardest, stiff taxes on tobacco can reduce healthcare costs by billions.

High cigarette taxes curtail smoking and reduce the habit's societal costs. But they also take a big bite out of the earnings of America's poor, who smoke cigarettes at nearly twice the rate of the average American.

That's the paradox of the new 62-cent federal tax on tobacco, a historic hike that puts the average pack of smokes at $4.80 – $3.10 of which is taxes.

Ironically, wealthier smokers of high-end cigars aren't likely to see any increase during their next visit to their local Tabac, since cigar rollers and dealers have vowed to absorb a new "per stick" hike for cigars.

Indeed, balancing national health benefits with the potential fallout of higher taxes – including possible clashes between law enforcement and Americans who resort to the black market or use overseas websites for their tobacco needs – are only a few of the quandaries for state lawmakers, Congress, and President Obama, who reportedly has been trying to quit the habit himself.

What differentiates this tax hike from previous efforts is that it's the largest one yet that doesn't contribute at least some funds to helping people quit. And it comes at a time when many cash-strapped states are cutting such programs.

"It depends what side you're on: If you think [tobacco taxes] are a great way to raise revenue, it's good. But if you want to look at the impact on different segments of the population, you might want to consider who's going to be hit the most," says Jim Sherman, an Indiana University psychology professor who has studied the social impacts of smoking. "And it's true that [regressive taxes like those on tobacco] hit lower-income populations the most."

Proponents of the tax hike say that as many as 1 million Americans are likely to quit as a result, and up to 2 million teenagers may never start. This could reduce the burden on health and social costs by some $44 billion, according to the Campaign for Tobacco-Free Kids. Millions are likely to cut back on their smoking, which also lowers health risks, though not as much as quitting altogether.

About half of the states also are considering tobacco tax hikes, chiefly to shore up flagging state and income tax receipts. Rhode Island raised per-pack taxes by $1, bringing the total taxes for a pack in the Ocean State to $3.46. Even South Carolina, which has the country's lowest tax – just 7 cents – is drawing closer to a 50-cent hike, which passed the state House of Representatives recently.

The reaction to the federal tax hike has been dramatic in the past few weeks. Calls to some state "quit lines" have quadrupled since last month, to the point where Michigan had to close its line until October because it spent all its funding to handle the crush of calls.

Studies of past tax increases have shown that purchases dip dramatically shortly after implementation and then inch back up. Overall, however, the number of smokers is declining by about 3 percent a year. Price is the chief deterrent, according to the Centers for Disease Control and Prevention (CDC) in Atlanta.

Research shows that most Americans support tobacco taxes – not surprising, since 80 percent of Americans don't smoke. Even many low-income Americans think it's a good idea. In a recent South Carolina study, 67 percent of people making less than $20,000 a year supported a 93-cent tax increase on cigarettes.

As a result, there have been more than 80 tobacco tax increases in 40 states in the past 10 years.

"Most legislatures realize that it's a win-win-win," says Peter Fisher, vice president for state issues at the Campaign for Tobacco-Free Kids. "It's a win for health reasons, it's a win when it comes to state finances, and it's a win with the voters."

Yet support for tobacco taxes diminishes when at least some of those revenues are not used to help smokers quit, Mr. Fisher acknowledges.

To that point, this month's federal tax hike will go entirely to funding the SCHIP program, a federal health-insurance plan for children.

Even the nation's smoking czar has concerns about taxing smokers while not using some of that money to help them quit.

"There does need to be more thought given to how tax revenues can be poured back into helping them get off the habit," says Matthew McKenna, director of the CDC's Office on Smoking and Health.

Critics say that using tax policy to impose majority will on other Americans undermines the basic precept of self-determination.

"This is the tyranny of the majority going after an unpopular minority, and Americans should be concerned," says Curtis Dubay, a tax-policy analyst at the Heritage Foundation in Washington. "The tax levels in all states have far exceeded the cost per pack imposed on society. We're now at a punitive level of taxation."

Rather than quit, he says, many smokers are likely to turn to overseas tobacco sites as an alternative, or buy them in states with lower tax rates or from tax-exempt areas such as Indian reservations.

That's a concern for Florida legislators considering a $1 tobacco tax increase. Lawmakers are debating whether to put an "Indian tobacco stamp" on tax-free packs sold on reservations, making it a $1,000 misdemeanor for a non-Indian to possess them. This week, the Florida Senate removed a provision that would have given police agencies half of those fees, fearing what some called "cash register justice."

In the smoky environs of the Buckhead Cigar Club in Atlanta, the debate has centered around what many call government hypocrisy.

If the revenue is going toward child healthcare, "Why not put a tax on Pampers?" says Boram Lee, the club's owner. "Here they're completely funding a bill from a tax on an industry they're trying to shut down. So what happens when they've shut down everywhere you can smoke: Do they still expect that money to come in?"

But health officials say the beneficial impact of the tax hike will ultimately outweigh the costs.

"When you take a look at poor smokers, yes, some of them will continue to smoke and carry a higher burden in taxes and price," says Mr. McKenna. "But most of them will either quit or decrease the amount they smoke."

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