KERPEN: Tax hikes for the poor

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By Phil Kerpen

OP-ED:

President-elect Barack Obama swept large Democratic majorities into both houses of Congress in large part by promising that he would not raise taxes on any Americans making less than $200,000 per year, and would provide most Americans with tax cuts. This stand allowed Democrats to capture the traditionally Republican tax issue. It told voters that, this time, Democratic control wouldn't mean steeply higher taxes. Yet there are rumblings that one of the first orders of business for the expanded Democratic majorities in Congress will be to raise taxes on millions of Americans nowhere near being rich, including many below the poverty line. It's a cigarette tax hike, included in a bill to dramatically expand government-run health care. Passing it would signal that Democrats are still the party of higher taxes -- and not just for the rich.

The vehicle is a bill to reauthorize the State Children's Health Insurance (SCHIP) program, and while we don't know details yet we can assume it will be similar to last year's version, which increased funding $35 billion and expanded coverage from children in families making less than twice the poverty level up to three or even four times the poverty level. This expansion is financed by raising the federal tax on cigarettes from 39 cents per pack to $1 per pack, a 156 percent increase, and raising taxes on other tobacco products by a similar percentage.

This tax hike would wallop the poor. An analysis by the Tax Foundation found that cigarette taxes hit the poor harder than any other federal tax, hitting the bottom 20 percent, 37 times harder than raising the same amount of revenue from the income tax, because while the income tax falls mostly on people with higher incomes the cigarette tax falls heavily on less affluent Americans.

This dramatic expansion of SCHIP is a bad idea, regardless of how it's funded. It would be a big step toward universal government children's coverage which could, in combination with other program expansions, lead to a universal government-run health insurance system. Such a system would be rife with long waiting lines and substandard quality of care -- judging by international experience. Indeed this comes at a time when the rest of the world is moving away from government health insurance. This is made even more egregious when funded by a cigarette tax hike that forces the poor to pay for expanding this entitlement into the middle class.

If the idea of the SCHIP debate as a proxy for socialized medicine sounds far-fetched, all we have to do is recall that in April of 2007, an Illinois congressman said that the SCHIP debate is "spring training" for universal health insurance. That congressman is now presumptive White House chief-of-staff Rahm Emanuel.

Understood in those terms, it's easy to see how SCHIP expansion became such a disputed partisan issue, and why liberal Democrats have so avidly supported it. The inclusion of the cigarette tax hike, however, in the 2009 version would be puzzling. Not just because it would blatantly violate the campaign promise made by Mr. Obama and other Democrats not to raise taxes on anyone outside of the top five percent, but also because it runs counter to the primary thrust of federal policy in this economic crisis, which is to shovel as many billions -- even trillions -- of dollars out of the Treasury and the Federal Reserve as possible, without respect to the outlook for federal deficits.

One argument for including the tax hike would be that SCHIP is an ongoing program that needs a dedicated revenue source to avoid permanently increasing federal deficits, unlike short-term bailout and stimuli that are envisioned as one-time spending. But that argument falls flat when the revenue source contemplated is a cigarette tax, a tax that is declining in revenues as smoking declines, and that in the long term will approach zero because the tobacco industry no longer markets to non-smokers.

The rationale that it's less about raising taxes than discouraging smoking is a convenient one, but little comfort to many addicted smokers who find themselves unable to quit despite rising costs. Mr. Obama, who recently admitted that he still smokes, should be more sensitive to how difficult it is to quit.

If there is a vote on increasing cigarette taxes this January, it will really be about one thing: Will Democrats let their desire to use taxes to control our lives win out over their promises to avoid tax hikes on the poor and the middle class? If they decide that punishing smokers with higher taxes is more important than their campaign promises, we can expect many more tax hikes to come - on the poor and middle class as well as the rich.

Phil Kerpen is director of policy for Americans for Prosperity.