Obama's $78 Billion Tax Hike on Low-Income Americans

Since the release of President Obama’s budget, there has been a lot of focus on the entitlement reform aspects of it. 

One of the less commented-upon aspects of the budget, however, is the nearly $1 per pack federal cigarette tax hike that it would institute to fund universal pre-Kindergarten education. The proposal would raise $78 billion over the next decade. 

As Bloomberg News rightly points out, this is a crazy scheme that makes no financial sense:

Similarly, increasing the federal cigarette tax to $1.95 per pack to pay for a new national preschool program sounds great. Except when you consider that tobacco taxes are extraordinarily regressive, increase smuggling, and impose costs on a small and dwindling part of the population to pay for a putatively permanent federal program. It’s hard to see how this tax is particularly fair. And as the rate of adults who smoke cigarettes continues its inexorable long-term decline, it’s even harder to see how the revenue will be sustainable.

Last year, a major study showed just how regressive tobacco taxes are: In New York, the state with the highest cigarette tax in the nation and in parts of which a pack of premium brand cigarettes can cost you over $10 per pack, low-income smokers “spent nearly 25 percent of their household income on cigarettes.” Meanwhile, nationwide, the poorest smokers spent nearly 15 percent of their household income on cigarettes. So, under Obama’s new budget plan, these people will be hammered hardest and even harder than they have been to-date.

Unless they quit, that is. And of course that is the really crazy part of the plan. Obama claims universal pre-K education is a necessary item for the federal government to fund. It’s going to have a very hard time funding this “essential priority” if smokers quit, cut back, or — increasingly a possibility in certain major cities — start buying illicit cigarettes smuggled in from overseas, to evade taxes. 

In Rhode Island, which has the nation’s second highest cigarette tax, just last year, a Chinese national was charged with smuggling more than $1 million worth of counterfeit Marlboros into Miami. And in 2011, smugglers dealing in Vietnamese-made Marlboros got busted in Washington State for evading a whopping $24 million in taxes through their illicit importation of the smokes.

If Obama’s scheme were to succeed, it would incentivize both smokers quitting and this kind of criminality, which is bad news if you think funding universal pre-Kindergarten is a national priority.