Today, on April 1, 2009, one of President Obama’s first broken campaign promises – the promise not to raise taxes on anyone making less than $250,000 – takes effect in the form of the federal excise tax increase on tobacco products contained in the State Children’s Health Insurance Reauthorization Act of 2009.

As of today, smokers will have to pay an additional tax 61 cents per pack of cigarettes, amounting to a 156 percent increase – and the very people President Obama promised to spare from higher taxes are bearing the brunt of the cost, since (as ATR has been pointing out on numerous occasions)

  • 55 percent of smokers are “working poor”
  • One in four smokers live below the poverty line
  • On average, smokers, whose median income is a little more than $36,000, make about 30 percent less than non-smokers.

In today’s Wall Street Journal,

Brad Schiller, professor of economics at University of Nevada, Reno raises similar points:

The fairness issue is particularly troubling. According to the Centers for Disease Control and Prevention, only one in five Americans smokes, so the excise targets a minority — and over half of all smokers are low income, and one of four are officially classified as poor.

Of course, the White House now claims that President Obama’s promise not to raise taxes on anyone making less than $250,000 was a qualified promise. According to a White House spokesperson:

The president’s position throughout the campaign was that he would not raise income or payroll taxes on families making less than $250,000, and that’s a promise he has kept.

However, that is not what he said, as this video proves.  Words matter, Mr. President, and a promise is a promise. 

However, this is by far not the only problem.  This tobacco tax increase was enacted as a funding source for the expansion of an already flawed program – SCHIP.  Funding  an expansion of this program on an already-declining revenue stream is irresponsible. Ultimately, the tobacco tax increase serves as a placeholder for the next tax increase that will be required to sustain funding levels once the revenues from the tobacco tax dry up. 

And there is a ripple effect that will be felt in the states, too, as Schiller explains:

We should also note how this tax increase affects state finances. State governments rely on their own cigarette excise taxes for hefty revenue streams. In 2008, according to the National Tax Foundation, state governments took in $15.4 billion in cigarette taxes. Hard-hit Michigan, Pennsylvania, and California each took in over $1 billion; New York and Texas took in $1.5 billion each.

Higher taxes discourage cigarette sales. Nobel economist Gary Becker pegs the long-run price elasticity of demand for cigarettes at 0.8 — i.e., a 10% increase in price causes an 8% decline in unit sales. The Obama tax hike translates into a 13.3% increase in the average pack price. That implies a 10.6% decline in unit sales — which the National Tax Foundation has calculated adds up to a $1 billion overall revenue loss for hard-pressed states.

Because Southern states have low tax rates (most less than 40 cents per pack), the federal tax hike raises their cigarette prices by a larger percentage and thus cuts deeper into their unit sales. New York, by contrast, has the highest state taxes ($2.75 a pack) and prices, so it gets hit less in percentage terms. The Tax Foundation estimates a 12.6% revenue loss for South Carolina this coming fiscal year, and a 6.7% loss for New York.

None of this is good for the economy. Consumers and state governments are already having a tough time making ends meet. Burdening them with a new $38 billion tax and a $1 billion cut in revenues isn’t going to help create jobs.

And while I wish all this was an April Fool’s joke, it is not.