This was only a matter of time:
On January 13, 2010, Rep. Steve Cohen (D-TN) and co-sponsor Rep. Lloyd Doggett (D-TX) introduced bill H.R. 4439 to congress to raise the federal pipe tobacco tax from $2.8311US per pound to $24.78US per pound and “To amend the Internal Revenue Code of 1986 to impose the same rate of tax on pipe tobacco as is imposed on roll-your-own tobacco.”[...]
If this bill passes, the average increase to your favorite blends will be about:
$2.43US per 50gr
$2.74US per 2oz
$4.86US per 100gr
$10.98US per 8oz
$21.95US per 16oz
$24.15US per 500gr
These prices would be added onto the price you are currently paying for those amounts of pipe tobacco. So with the average price of 100gr tin McClelland Frog Morton being about $13.20US, the new price would be $18.06US! That is outrageous!
The motivation for the tax increase is to stop producers of roll-your-own tobacco (RYO) from repackaging their product as pipe tobacco, which is taxed at a lower rate. The two products are very similar and in the past were taxed at the same rate of $1.10 per pound. SCHIP created a huge disparity by raising the tax on pipe tobacco to $2.81 and the tax on RYO to an astronomical $24.62. RYO producers predictably reclassified their products just to keep their companies alive.
The congressmen introducing this bill are correct that the two types of tobacco should be taxed equally, but the solution is to lower the tax on RYO, not to tax both products at the insane new rate.
[Hat tip to the ever-alert Jan!]
Previously:
SCHIP tax avoision
Children, say “thank you for smoking”
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Patrick and Patrick of the Stogie Guys are reporting live this weekend from the International Premium Cigar and Pipe Retailers Association Trade Show in New Orleans. (Man, I’m missing all the fun events in New Orleans this summer!) My favorite bit so far is this clever subterfuge to get around the new SCHIP tax:
In our preview on Thursday we mentioned Arganese was creating a two-in-one cigar designed to minimize the SCHIP tax. Below is a photo of the cigar, called “S-This.” What might not be clear from the photo is the cigar is really two smokes, connected at their heads with an extra bit of wrapper that can easily be removed by the smoker. So while for tax purposes the consumer is buying five cigars, in reality they get ten smokes. Sneaky.
Joining two stogies and letting the consumer cut them apart is a great idea. I don’t know how these smoke, but I’d buy some just to stick it to the man.
Previously:
Will SCHIP sink the states?
SCHIP and “the” tobacco tax
Children, say “thank you” for smoking
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The New York Times ran a timely article this week about states’ reliance on tobacco taxes:
Florida’s proposed withdrawal is perhaps the starkest example of the growing addiction to tobacco-related money. Since 2001, cigarette tax increases and diversions of tobacco settlement payouts have become a favorite solution for budget crises nationwide. But as the current recession deepens, disputes about how the money should be spent have intensified, even as tobacco money’s potency has been weakened by past use.
“While states have viewed tobacco as the first ‘go to’ tax for the better part of a decade, it won’t be anywhere near enough,” said Donald J. Boyd, a senior fellow at the Rockefeller Institute of Government, a research arm of the State University of New York. “Increases in other taxes — yet to be proposed and enacted — will be far larger than in the last recession, and the relative importance of tobacco tax increases will be less.”
At least 17 states, including California and New York, have already sold bonds based on future tobacco settlement payouts and spent some or all of the money before they have it, according to the National Conference of State Legislatures. Moreover, cigarette taxes are also less lucrative than they were a decade ago because cigarette sales in the United States have dropped by more than 20 percent.
Nonetheless, two weeks into the year, conservative, tobacco-friendly states like Kentucky, Georgia and Mississippi are considering sizable tax increases on cigarettes, while some with liberal Democratic governors — including Michigan, Ohio and New Mexico — are looking at ways to redirect tobacco settlement money to close budget gaps or for economic stimulus packages.
One unintended consequence of SCHIP will be its effect on state budgets. It’s a money grab for the federal government, but by more than doubling the tax on cigarettes it’s going to reduce consumption and therefore tax revenues at the state level. With many state budgets already in crisis, that could be a real problem. Smokers’ addiction to tobacco is nothing compared to the states’. As this golden goose gives out, non-smokers may see their own favorite products targeted next.
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According to a press release from the International Premium Cigar and Pipe Retailers Association, this is the breakdown on the new taxes as passed in the House:
SCHIP Legislation Details
The new tax rates are effective April 1, 2009;
The cigarette tax rate goes from $.39 per pack to $1.00 per pack;
The tax on snuff goes from $.585 per pound to $1.50 per pound;
The tax on pipe tobacco goes from $1.0969 per pound to $2.8126 per pound;
The tax on RYO goes from $1.0969 per pound to $24.62 per pound (not a typo).
Additionally the definition of RYO has been expanded to include cigar wrappers to address the “blunt wraps” issue;
The tax change to small cigars (cigars weighing less the three (3) pounds per thousand will be phased in over five (5) years at the following rates per year:
2009 & 2010 - $.25 per pack
2011 & 2012 - $.50 per pack
2013 & 2014 - $.75 per pack
2015 and beyond - $1.00 per pack
We were successful in continuing to have the floor tax NOT apply to large cigars; however it does pertain to any other tobacco products.
As expected, cigarette smokers will see see their federal tax rates more than double. It looks like people who roll their own cigarettes are going to be hit even harder though: $1.10 per pound to $24.62 per pound! That is an insane tax increase. I’m unsure as yet what the impact of the floor tax will be.
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One of Obama’s first acts in office is likely to be approving an expansion of the State Children’s Health Insurance Program. Since SCHIP is “for the children” and will be funded by taxing unpopular smokers, passage in Congress is a sure bet, as is Obama’s signature.
Full details of the House bill won’t be available until tomorrow (Tuesday), but according to George Edmonson at Stogie Guys a potentially devastating blow to small businesses has probably been dodged: the floor tax that might have applied to current stocks of cigars held by tobacco shop owners. Additionally, there’s speculation that the cap on taxing individual cigars will drop from the $3 per stick that was vetoed by George Bush last year, which was itself down from an original $10 proposed cap. Read George’s post for details.
That’s the good news. The bad news is that taxes on tobacco are still going to rise, making cigars more expensive and significantly increasing the price of cigarettes. The latter is a consumption tax that will fall disproportionately on the poor, marking a painfully regressive start for the incoming administration. See Jacob Sullum on this point here.
Regardless of SCHIP’s merits, it shouldn’t be funded by additional taxes on tobacco. As Tom Firey and I wrote for the Cato Institute last year:
Smoking in the United States is already declining significantly — largely as a result of public awareness of its dangers, not higher taxes. The declining number of smokers makes cigarette tax revenue unstable. Congress’s Joint Committee on Taxation projects that if the new tax rate is implemented next year, tobacco revenues will fall nearly 10 percent over the next decade…
SCHIP’s advocates believe the program is critical to providing healthcare to children. That’s debatable. But if Congress and the president decide to expand the program, they should cover its new costs with general tax revenues, not taxes on smokers alone. Higher tobacco taxes are unfair, unadvisable, and unlikely to bring in enough money.
I don’t have any special insight into SCHIP as health policy. For a critique and some alternative approaches, see Michael Cannon.
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Jacob Grier is a freelance writer, barista, mixologist, and magician in Portland, OR. He writes, eats, and drinks a lot. His articles have appeared in The Washington Post, Reason Online, The Oregonian, and other publications.
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