The government’s rationale for the high excise tax on tobacco products is contradictory. However, during yesterday's Senate Finance Committee hearing on the impact of current federal treatment of tobacco, Chairman Wyden paid little attention to the increasingly unstable nature of this tax regime, claiming instead that federal programs are suffering from a loss of revenue due to evasive behavior. This, he bemoaned, results in declining resources to fund the Child Health Insurance Program and its efforts to "discourage smoking among America's children and teens."
The Chairman exposed the tortured sentiments proponents of big government can't ever seem to reconcile on discriminatory excise taxes; if the tax is supposed to serve as disincentive to use tobacco, the revenue generated is naturally going to decline. So why, then, continue to promote their use as a funding mechanism for spending priorities?
Scott Drenkard of the Tax Foundation made this very point in his testimony to the committee. Americans already saw the largest cigarette federal excise tax increase in history when the tax was raised in 2009 to fund CHIP. The Obama administration has proposed raising the tax once again in order to fund universal preschool. Mr. Drenkard stressed that revenue from the tobacco tax is not sustainable in the long run due to steadily declining tobacco use over the past 50 years. He points out that the revenue projections in the President’s FY 2014 budget show that revenue from the increased tax will be only $6 billion by 2023, $2 billion below the costs for universal preschool.
The real issue here is not the so-called loopholes, but the fact that the administration and its allies in Congress chose to tax an elastic consumer product to fund costly federal programs. Even the largest federal cigarette tax increase in history wasn't enough. This clearly illustrates the fact that if you give proponents of big government an inch, they’ll take a mile. Give them a tax hike, and it still won’t be enough to cover a costly agenda. The instinct will always be to push for higher taxes to fund even costlier spending priorities.