Tax Facts - Federal

click to enlarge image Nearly 50% of the price of a cigarette pack is taken by the U.S. Government. In fiscal year 2007 alone, the federal excise on cigarettes, 39¢ per pack, grossed more than $7.3 billion in tax revenue. The unfortunate truth is the money does not always go where you expect.

Find out how your tax dollars are spent>>

Contact your U.S. Senators to oppose 61-cent increase in FET on cigarettes

The House of Representatives has approved by a vote of 289-139 an extension and expansion of SCHIP, an insurance program initially designed to make health-care insurance available to low- and middle-income people. The $35 billion expansion of the program will be funded by a 61-cent-per-pack increase in the federal excise tax on cigarettes, and similar increases in taxes on other tobacco products.

The U.S. Senate Finance committee is expected to soon begin their analysis of the bill. Should the bill pass both houses and be signed by President-elect Barack Obama, it is likely to be effective April 1, 2009.

You may recall that the House and Senate twice passed essentially this same bill in the last Congress, and it was twice vetoed by President Bush. At that time, Congress temporarily extended the funding for the program through March of 2009, so reintroduction of this issue before the new Congress had been expected.

Now is the time to tell your U.S. Senators not to fund SCHIP by increasing the federal cigarette excise tax.

Call 1.877.857.8074 (toll-free) or email your member of Congress.

Funding SCHIP with a Cigarette Tax is a Bad Idea

Cigarette taxes are paid mostly by the “working poor” or those below the poverty line.

• 55% of smokers are “working poor.”
• One in four smokers live below the poverty line.
• Smokers make about 30% less than non-smokers.

The working poor would be paying for insurance for families that make more than twice as much as they do.

• Median income of smokers: $36,330.
• Some states have proposed that SCHIP cover families making as much as $80,000.
• Lower-income families have already been disproportionately hurt by the current recession.
• Is this an appropriate meaning of “redistribution of the wealth”?

SCHIP could cost the states $1 billion every year in MSA payments and other revenue.

• Higher taxes lead to lower legal cigarette sales. Lower sales lead to lower MSA payments to the states and lower state excise and sales tax revenues.
• Since 1998, the states have received more than $8 billion in MSA payments.
• Payments to the states are based on the volume of legal sales in the state – if an excise tax drives down legal sales, the state’s MSA payment will decline.
• Higher taxes cause some smokers trade down to cheap brands that make no MSA payments.
• 44 states are in budget-crisis mode already in 2009 – lower revenues will exacerbate their problems.

Cigarette tax hikes cost jobs and profits.

• Cigarettes represent 34% of convenience store sales and 21% of their gross-margin dollars.
• As legal sales decline after a tax increase, retail and wholesale jobs are lost and profits drop.
• Tobacco manufacturers and their suppliers may need to cut jobs as their sales fall.

Cigarette tax revenues are a declining and unstable revenue source.

• Legal sales decline about 2 – 4% a year, and will decline faster if tax increases.
• Health care costs are rising 8 – 10% a year.
• Rising unemployment driven by a troubled economy is likely to increase the number of children eligible for SCHIP. Thus, costs of the SCHIP program may grow faster and higher than those of the overall health care industry, further widening the gap between cigarette tax revenues raised and actual costs.

One of three things would need to happen if SCHIP is going to avoid immediate budget shortfalls:

• About 22 million additional people would need to take up smoking.
• Existing smokers would need to smoke a lot more.
• Other taxes must be raised to generate revenue for the program.

Government already gets plenty of money from the sale of cigarettes.

• 50% of the cost of a pack of cigarettes goes to government.
• $34.4 billion raised in cigarette taxes in 2007 alone – more than twice the amount raised by alcohol taxes.
• Youth smoking rates are down 50% in the last 10 years; twice as many kids use alcohol as cigarettes.
• 98% of cigarettes are sold to adults.
• Every state except one meets federal guidelines for preventing sales to minors.
• The same rules for alcohol should apply to cigarettes: make tobacco illegal for minors to buy, use or possess, and a felony to smuggle.