Smoke, mirrors and taxes

Congress proposes to fund its $35 billion expansion of children’s health coverage — assuming it survives an expected presidential veto — with a 61-cent increase in the federal cigarette tax, bringing it to a dollar a pack.

Superficially, the idea has considerable appeal. The high tax might discourage — it certainly punishes — people engaged in a life-threatening habit that the government officially discourages. Simultaneously, it provides the funds to extend health coverage to uninsured children.

But Congress may find it has run afoul of the law of unintended consequences.

If the tax works as planned, the number of smokers will decline and so will the revenue. Increasing the tax again might run afoul of another law — diminishing returns — and Congress would face the unpleasant task of either capping the program or increasing taxes elsewhere.

Critics of the tax say that funding the natural increase in the child health program over the next 10 years will have Congress in the perverse position of needing 22 million new smokers.

The tax will fall most heavily on the poor and the poorly educated because disproportionately more of them are smokers. It may be correct if mean-spirited to say they shouldn’t be smoking in the first place, but taxes that single out a class of people are generally not good policy. However, the cold political fact is that cigarette smokers are just not politically popular and the imposition of this punitive tax smacks of “serves them right.”

The tax increase will raise the cost of cigarettes substantially. Six states already impose a tax of $2 per pack or more — Arizona, Maine, Michigan, Rhode Island and Washington, with New Jersey topping the list at $2.57. And counties and cities also add taxes, with New York City hitting smokers for $1.50 a pack on top of the state levy of $1.

As cigarettes become more expensive, they also become more attractive targets for robbery, theft and hijacking, and more states are likely to join New York and New Jersey in their battle with a black market in bootlegged cigarettes.

The price of a justifiable expansion of child health care may have the unintended consequence of creating a new class of tax evaders.