Unfortunately, it is not taking very long for the Democrat-controlled U.S. House of Representatives to try to start hiking taxes. Can you help to stop them?
As various media reports have noted, the U.S. House of Representatives is getting set this week to vote on a bill expanding the State Children’s Health Insurance Program (SCHIP). The bill would wind up boosting the number of individuals enrolled in the program from 6.6 million to more than 10 million.
That, of course, means rising costs for taxpayers. The proposal would increase the federal tobacco tax, with the levy on a pack of cigarettes jumping by 156 percent, from 39 cents to $1.
There are many problems with this tax increase. In
a January 9 letter to each member of the House of Representatives, SBE Council President & CEO Karen Kerrigan explained four reasons for opposing this tax increase:
First, small retailers would get hit hard by this large tax hike. Higher taxes translate into reduced sales, less foot traffic and fewer purchases of other goods, and lower earnings. That means less money available for investment, expansion, and hiring and paying employees. Already, many small firms and retailers are teetering on the financial edge. During this extraordinarily difficult economic period, Congress needs to focus on legislative efforts that create jobs, and revenue increasing opportunities for U.S. small businesses. Raising the cigarette tax runs counter to what needs to be done for small retailers.
Consider that the National Association of Convenience Stores has reported that cigarettes account for 38.6 percent of all in-store sales, with revenues totaling $41.1 billion, or $392,050 per store. Meanwhile, convenience stores employ 1.7 million people. Based on these numbers, the association calculates that cigarette sales are equivalent to more than 656,000 jobs in the industry alone. That business and many of those jobs would be lost if a tax increase were passed.
Indeed, the negatives would spread throughout the economy. For example, in February 2007, assessing a possible 50 cents increase in the federal excise tax, the Congressional Budget Office noted: "Because excise taxes reduce the tax base of income and payroll taxes, higher excise taxes would lead to reductions in income and payroll tax revenues."
Second, it should not be forgotten that this federal tax increase would come on top of very large cigarette tax hikes in the states in recent years. Consider, for example, that from 2000 to 2008, 44 states and District of Columbia raised cigarette taxes, and the average increase over this period was 287 percent. Unfortunately, more excise tax increases are being considered in the states this year. It's already bad enough for consumers and small businesses without the federal government piling on more.
Third, the combination of high federal, state and local cigarette taxes means that incentives are boosted for counterfeiting, and for moving supply and purchases underground. That means subsidizing all kinds of criminal activity, including smuggling and terrorism. A 2004 GAO report declared: "Many states ... have increased cigarette taxes, resulting in a large difference in the wholesale price and the price paid by consumers at the retail level and creating potential illicit profits of $7 to $13 per carton of cigarettes." It continued: "As cigarette taxes increase, so do the incentives for criminal organizations, including terrorist organizations, to smuggle cigarettes into and throughout the United States." Taxpayers naturally have to pick up the tab to fight such criminal undertakings, while expanded black market purchases mean additional lost business to small retailers.
Fourth, it is crucial to recognize that the cigarette tax is not a reliable revenue stream. That is, consumption, and therefore sales and tax revenues, are on the decline. Combine this fact with the negative revenue effects of smuggling, underground transactions, and declining business, incomes and jobs, and it is clear that tobacco taxes are not reliable revenue sources for government.
Time and again, revenue projections from tax increases fail to meet expectations. According to a study by Fiscal Planning Services, out of 57 tobacco excise tax increase from mid-2002 to mid-2007, 16 matched or exceeded the expected revenue estimates, while 39 fell short of projections. In New Jersey, for example, a 2006 excise tax hike was expected to increase revenue by $30 million, but the state actually lost revenue due to a larger than expected drop in sales.
Given that spending on health care programs like the State Children's Health Insurance Program (SCHIP) surge upward, there is no way that a higher cigarette tax would provide sufficient revenues over time. That means additional tax increases will be necessary.
In 2007, President Bush vetoed bills to expand SCHIP and impose higher taxes. Unfortunately, President-elect Obama supports the idea.
How about weighing in with your member of the House and your two U.S. senators on this bad idea? The U.S. Capital switchboard phone number is 202-224-3121. The operator can connect you with your House member, and/or senators. Why not give them a ring, and let your small business voice be heard?Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council
