Obama’s First Tax Hike

It’s extremely early in the Obama administration, yet, the President just signed his first tax increase into law.

The bill expanding the State Children’s Health Insurance Program (SCHIP) passed the House initially by a 289-139 margin. The Senate’s amended version passed 66-32, with the House approving it by a 290-135 vote. Then came the President’s signature on February 4.

This legislation expands government spending on health care, by another $33 billion on SCHIP through the end of FY2013, according to the Associated Press.

To pay for this, the federal excise tax on a pack of cigarettes was jacked up from 39 cents per pack to $1.01. That 62-cent increase (the House originally called for a 61-cent increase) amounts to a 159 percent increase in the tax.

What will be the results?

First, further expanding government’s involvement in health care means that costs will be pushed even higher, since third party payments mean that health care providers and consumers care little about prices and utilization, and since government cares little about how taxpayer’s dollars are spent.

Second, the higher federal excise tax will hit small retailers hard due to lost sales, lost foot traffic, fewer consumer dollars left for other purchases, and expanded underground purchases.

Third, law enforcement will have to deal with expanded smuggling and counterfeiting by all kinds of criminal groups.

Fourth, other taxes eventually will have to be increased, as revenues from the excise tax fall short of expectations due to the trend toward reduced smoking and increased underground purchases.

That’s the story of President Obama's first tax hike.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council