What is the Tobacco Tax?

The current tobacco tax rates took effect in April 2009.

Tobacco products are taxed at both the state and the federal level. In 2009, because of a national economic crunch, the federal government steeply increased the tax on these products nationwide, while several states did the same locally. If you use tobacco, it is important to understand how you are taxed on those products, the rationale behind taxing them, and how your tax dollars are being used.

History

Before April 1, 2009, the federal tax on tobacco products was roughly 39 cents per pack. On Feb. 4, 2009, the United States House of Representatives passed, with a vote of 289-139, the Children's Health Insurance Program Reauthorization Act , which authorized a 156 percent increase in the federal excise tax on tobacco, and enforced a one-time floor-stock tobacco tax. This made the standard federal tax roughly 101 cents per pack on cigarettes and cigars.

Funding

The tax is earmarked to fund S-Chip, or the State Children's Health Insurance Program. The tax was designed to provide this program with $33 billion over the course of four and a half years. This insurance program, which was established in 1997, provides matching funds to states that provide insurance for families with children who are otherwise uninsured. Specifically the program is designed to provide insurance to those who cannot afford health insurance without assistance, but make too much money to qualify for Medicaid. This tax increase was designed to expand the healthcare program. It now covers an additional 4 million children and pregnant women.

Rationale

According to the Tax Foundation Organization, there are five main arguments made to justify increasing taxes on tobacco products. First, raising the tax on tobacco products, thus raising the cost of tobacco products, will decrease the number of kids using them. Advocates of tax increases also argue that smoking is detrimental to the nation's health, and its negative effects can be minimized if it is taxed at a higher rate. This is taken a step further when proponents justify the tax increase based on government spending. There is government spending related to tobacco use, and so taxing those who use tobacco products is justified to offset those costs. It is also argued that those who smoke justify their act irrationally, and regret it later, and increasing the tax will counter-balance this irrationality. Finally, the need for revenue, from any available source, is used to justify increasing taxes on tobacco products.

State

State tax rates vary greatly from state to state. According to NoCigTax.com, they range from range from 7 cents per pack in South Carolina to $3.46 per pack in Rhode Island. Cities and counties nationwide also enforce local taxes on tobacco products, which can affect their final purchase price.

Effect

The socio-economic group most affected by tobacco tax increases is the poor. They are also the group most likely to quit smoking because of the tax increases. According to USA Today, a 10 percent increase in the cost of cigarettes results in a 4 percent decrease in tobacco use, historically. Matthew McKenna, director of the Office of Smoking and Health at the Centers for Disease Control and Prevention, expected that, following this trend, about 1 million of the 45 million Americans using tobacco products would quit as a direct result of the 2009 increases.

References

• The Tax Foundation: Funding S-CHIP with Federal Cigarette Tax Increase is Poor Tax Policy
• NoCigTax.com: Tax Facts- State
• TTB.gov: Federal Excise Tax Increase and Related Provisions
• USA Today: Biggest U.S. tax hike on tobacco takes effect