A fiscal smokescreen

The withdrawal symptoms are unmistakable: dry mouth, headaches, anxiety, irritability. Cigarette taxes are addictive, and if spendthrift lawmakers don’t get a handle on their nasty habit soon, no patch or chewing gum will save them from the pain of going cold turkey.

States have been boosting their per-pack tax rates for years while simultaneously prohibiting smoking in more and more public and private spaces. Now Congress wants to expand the State Children’s Health Insurance Program on the lungs of smokers by increasing the federal cigarette tax 156 percent, to $1 per pack.

Majority Democrats, joined by many minority Republicans, are counting on that tax hike to generate about $35 billion over the next five years. That funding would then subsidize medical insurance for more middle-class children.

At the same time, many lawmakers have expressed hope that the legislation will encourage more people to stop smoking. But if that happens, they won’t have enough money to keep the program afloat. Rep. Jack Kingston, R-Ga., told his colleagues during House debate that “in order to get enough money to pay for this, it would require 22 million new smokers.”

But that’s not going to happen if this bill becomes law. Consumers don’t rush to purchase goods when prices go up. And they’re especially adept at modifying their spending to avoid tax increases.

For proof of that, Congress should look north, to New Jersey. After that state’s legislature raised cigarette taxes for the fourth time in six years, to a nation-leading $2.571/2 per pack, cigarette tax revenues declined, from $787 million in fiscal year 2006 to $764 million in fiscal 2007.

New Jersey residents hadn’t cut back on smoking. Rather, more people started buying smokes online, in states with much lower per-pack taxes (cigarette sales in neighboring Delaware are up), or through a burgeoning black market. When a state such as South Carolina levies a tax of only 7 cents per pack, it creates a tempting business opportunity for would-be smugglers.

Although the children’s health insurance bill would extend the program for five years, federal budgeting rules require lawmakers to account for 10 years of costs. Lawmakers know their tax increase will result in diminishing returns between 2013 and 2017, so they’ve conveniently proposed reduced spending during that period.

Yes, Congress expects taxpayers to believe that after passing a massive program expansion, just five years from now they’ll authorize a massive program cut. More likely, once cigarette tax revenues are finally snuffed out, they’ll have license to squeeze every last dime out of another unsympathetic habit — maybe even yours.

This is a fraudulent, front-loaded funding scheme that tries to ignore the social and economic consequences of poor tax policy.