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Increasing the Cigarette Tax to Fund SCHIP Is Counterintuitive

by The Tax Foundation - 07/17/07 9:05 AM ET

Imagine taking one-quarter of the value of the Earned Income Tax Credit away from poor, working Americans. Sounds like the kind of thing nobody would be rushing to do, right?

Sadly, it turns out that policymakers are working on something that would have almost the same impact.

Tomorrow the Senate Finance committee will being markup of a bill to increase funding for the State Children’s Health Program, known as SCHIP. They plan to fund the $35 billion dollar expansion with a 61 cent, or 156%, increase of the federal cigarette tax.

Tax Foundation research reveals that no other federal tax hurts the poor more than the cigarette tax.

Not only are cigarette tax payers poorer as a group than the payers of other taxes, but there are also fewer of them. In fact, the burden of the proposed cigarette tax hike on the lowest-earning 20 percent of households is 37 times heavier than it would be if the government raised the money with the federal income tax.

Add into the mix that 36 states have hiked their cigarette taxes since 2002 – including five states just this year – and the impact only multiplies. Cigarette taxes are rising faster than even property taxes are.

Taxing only cigarettes to finance higher spending on SCHIP has absolutely no justification in sound tax policy. Cigarette taxes should be used to compensate for the costs they impose on society. But taxes levied above and beyond that point only serve to make the federal tax system less principled and more regressive.