Obama cigarette tax idea should go up in smoke, critic says

President Barack Obama’s proposal to increase cigarette taxes to help fund pre-kindergarten programs is not getting good grades from some political and business leaders.

A spokesman for Altria, the parent company of tobacco giant Philip Morris, offered a rationale for his opposition in a recent Atlanta Journal-Constitution article. His comments made us curious.

"We think it is patently unfair to single out adult tobacco consumers with another federal tobacco tax increase to pay for a broad, new government spending program claimed to have benefits for everyone," said the spokesman, David Sutton. "Moreover, excise taxes are regressive, disproportionately burdening middle and lower-income consumers — the very same consumers who have already endured five years of a stagnant economy and high unemployment."

It’s frequently said that excise taxes have a great impact on the poor. But as we’ve learned since the Truth-O-Meter started spinning here in 2010 that what’s often said isn’t always correct. We wondered whether Sutton is accurate to claim that excise taxes are "disproportionately burdening middle and lower-income consumers."

Excise taxes are special taxes on the purchase of items such as gasoline, alcoholic beverages and tobacco products. They are usually fixed amounts per item, rather than percentages of the price.

Obama has discussed raising federal taxes on cigarettes by nearly $1 a pack. By some estimates, approximately three of 10 low-income Americans are smokers.

Some people, like New York City Mayor Michael Bloomberg, believe raising taxes on cigarettes can discourage smoking. Bloomberg made that argument in 2002 when he tried to increase taxes on cigarettes.

"You raise it, consumption goes down," Bloomberg said, according to a citizen website that opposes what it called "smoker harassment."

Most research we found showed the mayor is generally right, but consumption doesn’t decline as much as anti-smoking advocates would like. The Atlanta-based Centers for Disease Control and Prevention reported in one study that a 10 percent increase in cigarette prices is estimated to reduce overall consumption by 4 percent. Other studies say the ratio is more like a 1 percent decrease in consumption for every 1 percent increase in price.

The CDC report says a larger percentage of low-income smokers quit once prices rise, but that those who decide to continue smoking are disproportionately impacted by increases in excise taxes.

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"Cigarette excise taxes increase the purchase price of cigarettes and can pose a disproportionate economic burden on lower socioeconomic populations," the report said. "However, because low-income groups are more responsive to price increases, increasing the real price of cigarettes can reduce cigarette consumption among low-income smokers by a greater percentage than among higher-income smokers."

One group of researchers recently examined this issue in New York, breaking down the lowest income group as those with an annual salary of less than $30,000. The widely reported study, released in September, was funded by the New York State Department of Health.

The researchers examined the changes from 2003-2004 to 2010-2011 as New York’s cigarette excise tax increased from $1.50 to $4.35. The percentage of income spent on cigarettes for all smokers nearly doubled, from 6.3 percent to 12 percent. For those classified as low-income, it doubled from 11.6 percent to 23.6 percent.

"Someone making $20,000 or $30,000 who smokes a pack a day is going to spend a much higher proportion of their income than someone who makes a higher salary," said the lead researcher, Matthew Farrelly, chief scientist at RTI International, a nonpartisan, nonprofit research institute based in North Carolina.

But Farrelly, who has written more than 80 research papers on tobacco use since 1998, said the impact for some low-income smokers can be "non-regressive, or progressive" when money from these tax increases goes to programs that help some smokers quit.

Despite the tax increase, the study found that the percentage of low-income smokers who quit lighting up barely declined. But Farrelly said that may be because some smokers are circumventing the higher taxes by buying cigarettes illegally, online or in other states with lower excise taxes. He and his team noted that tax-paid cigarette sales captured only 55 percent of cigarettes sold in New York.

We wondered whether the negative impact of the higher taxes on low-income smokers is overstated if many of them stop smoking. Farrelly said experts debate that question. He thinks there is still an impact.

"(The higher taxes) alleviates some of the regressivity," Farrelly said, "but it doesn’t eliminate it."

Across the Atlantic, when Germany increased its taxes on cigarettes in December 2004 and September 2005, approximately one of eight smokers went to a neighboring nation to buy their smokes at a cheaper price, a team of researchers found.

To sum up, Sutton said excise taxes on cigarettes are "disproportionately burdening middle- and lower-income consumers." Numerous studies show Sutton’s claim is on target, but a larger percentage of them also quit smoking. Our rating: Mostly True.