Paying for Health Reform: Suddenly, a $2-a-Pack Cigarette Tax Is Taken Seriously


Don't be surprised to see ultra-cool Joe Camel looking a little stressed behind his Ray-Bans in coming months. And his retired counterpart in the beer world, Spuds Mackenzie, may take on the alarmed look of a stray about to be snared by the dogcatcher.

Sin taxes are on the block again -- only now call them health taxes. Higher levies on tobacco are a likely source of revenue for President Clinton's health care reform package, and alcohol could be dragged into the flames as well. And the industries aren't at all happy.

It's already been a tough year for tobacco. First, secondhand smoke was declared a known human carcinogen, then the Clintons banned smoking in the White House. And the Centers for Disease Control found that in 1991, for the first time in 25 years, the percentage of Americans who smoke did not drop, prompting agency officials to call for a tax hike to help reverse the trend.

Suddenly, the prospect of a $2-a-pack federal cigarette tax (it's now 24 cents) is taken seriously; a year ago it wouldn't have passed the laugh test. The industry may have to measure victory by how low it can keep the increase.

After all, there's the potential for a fair chunk of change. A tax of $2 per pack would gain about $90 billion over five years. A slight rise in the tax on hard liquor and a large one for wine and beer would raise $4 billion a year. The sums would be a big help in offsetting the $30 to $90 billion estimated annual cost of meeting health reform goals.

And, as Office of Management and Budget Director Leon Panetta has said, higher taxes "would not only raise revenue, they would discourage unhealthy behavior."

There's an obvious conflict in wanting the revenue and also wanting to discourage behavior that produces it. But heavy tobacco taxes in Canada have led to both a significant decline in smoking and a big pot of new money. At least, if the money dries up, it will be because people are smoking and drinking less, leading to lower health care costs, tax advocates say.

Last year, smoking was responsible for 434,000 deaths, with another 53,000 from secondhand smoke. Medical costs of treating smoking-related illnesses such as lung cancer and heart disease run about $24 billion a year. Alcohol accounts for more than 100,000 deaths a year, as well as high rates of cardiovascular and other diseases.

Almost every poll shows increasing these taxes is popular with the public. But they are clearly regressive, meaning they hit the poor harder than the well-off. Large tax hikes will undoubtedly cost jobs, too, in the tobacco and alcohol industries.

And the industries, which are among the biggest donors of campaign money, won't give up easily. Up to now, they've had remarkable success. Federal cigarette taxes remained at 1951 levels until 1982, when they were doubled. Liquor taxes went up in 1985 for the first time since 1951. Beer and wine saw no federal tax hikes from 1951 until 1990, when budget summiteers doubled the beer tax to 33 cents per six-pack and raised taxes on a bottle of wine from 3 cents to 21 cents and the levy on a bottle of liquor from $2 to $2.14. Cigarette taxes went up 50 percent then, too.

Tobacco and alcohol firms are working with other excise tax opponents in the Coalition Against Regressive Taxation (CART). Whenever lawmakers consider raising excise taxes, CART kicks into overdrive, churning out economic studies, sending radio feeds to the districts of key congressional committee members and flying consultants to talk to editorial boards nationwide.

Excise tax foes have traditionally marshaled an unusual group of allies, including the congressional Black Caucus and the National Governors Association, which argues that excise taxes are the domain of the states. But this time the terrain could change. "We don't have policy" on higher excise taxes this year, said NGA spokeswoman Lisa Lackovic. "However this is going to relate to health care reform will determine our ultimate position."

The idea for a $2-a-pack cigarette tax came from the Advocacy Institute and the Coalition on Smoking OR Health, an alliance of the American Cancer Society, the American Lung Association and the American Heart Association. They've ready access to officials in charge of studying health care reform -- a far cry from the reception they got under George Bush.

In Congress, the joint powers of lawmakers from North Carolina, Virginia, Kentucky and other tobacco states, as well as those who don't like the tax's regressiveness, have kept taxes low. But the policy tide is obviously turning there, too. Sen. Bill Bradley, D-N.J., and Rep. Mike Andrews, D-Tex., members of the tax-writing Senate Finance and House Ways and Means committees, have introduced a bill to raise cigarette taxes to $1 per pack and increase them on other tobacco products, too. Most of the estimated $10 billion a year raised would be earmarked for health care.

Factored into the estimate is a big drop in smoking. In Canada, combined federal and provincial taxes on cigarettes went from an average of 46 cents in 1980 to $3.30 in 1991; a pack now costs more than $5.50. Tobacco sales have fallen 37 percent, and smoking by teen-agers has been cut by two-thirds. Yet there was still enough tobacco sold in Canada in 1991 to generate more than $7 billion in tax revenue -- up from about $1 billion in 1981 -- despite a large black market in cigarettes smuggled in from low-tax U.S.

In California, where voters approved a 25 cent increase in the state tobacco tax in 1988, per capita consumption dropped 27 percent from 1987 to 1992, while revenue nearly tripled. (It's tapered off as more people have quit).

Industry lobbyists are going into battle with trepidation.

"You can fight [the tax proposal] as a deficit measure." said James Healey, a former top aide to Ways and Means Committee Chair Dan Rostenkowski, D-Ill., who now lobbies for the Tobacco Institute with the firm Black, Manfort, Stone & Kelly. "If it becomes a health issue, it's more difficult."

But they're trying. Philip Morris has activated a toll-free 800 number so its friends can call members of Congress. Plans went awry when an anti-tobacco group faxed the number to health groups and the media. Later, the industry wrongly thought USA Today was doing a poll on the excise tax and advised its network to call in. The paper apologized publicly after tobacco supporters jammed the switchboard and other callers couldn't get through.

Industry officials say higher tax supporters are simply intolerant. "If 70 percent [actually 75] of people don't smoke, they aren't going to have to pay it," said Walker Merryman, vice president of the Tobacco Institute. "I think it's selfish." Mr. Merryman says a recent study done for the trade group shows that 34,000 industry jobs would be lost if the tax were only doubled.

Industry profits would surely drop. Tobacco is the most profitable crop, and cigarettes among the most profitable consumer products, in the country. Cigarette prices rose 10 percent a year through the 1980s, taxes aside. Philip Morris's profit on domestic cigarette sales in 1991 was 40 percent.

But those kinds of margins are already in trouble. Discount brands have carved out a third of the $45 billion domestic cigarette market, forcing the industry giants into the discount game. Philip Morris just announced cuts in the price of its leading brand, Marlboro.

The wine, beer and spirits lobbies are cranked up too. The beer wholesalers recently flooded Capitol Hill. Wine Institute president John DeLuca talked with President Clinton, Mr. Panetta and Treasury Secretary Lloyd Bentsen during Wine Appreciation Week in late February. The National Licensed Beverage Association has sent a consultant around the country giving lobbying tips to retail liquor vendors. Beer company CEOs have stopped in for talks with Sen. Daniel Patrick Moynihan, chair of the Finance Committee, and Ways and Means head Dan Rostenkowski.

The industry is targeting key members of the health reform task force, said Raymond McGrath, head of the Beer Institute and a former member of Congress and of the Ways and Means panel -- sending in lobbyists like L. Kirk O'Donnell, former counsel to one-time Speaker of the House Thomas P. O'Neill, Jr.

Wine people brag about evidence that the beverage actually promotes health. The beer folks maintain that their product has a "measurable nutritional value" and is the drink of moderation. And the hard-liquor industry says that it has taken the most tax increases and should be left alone. Liquor is taxed at $13.50 per proof gallon, while beer is at $6.45 and wine at $4.86 for the same alcohol content.

Then there's the jobs issue. Beer lobbyists cite a study that says the 1990 tax hike cost 31,000 jobs. A recent Peat Marwick study for the industry shows that another doubling of the tax could cost 66,000 jobs.

These arguments rankle the higher-tax advocates at the Center for Science in the Public Interest (CSPI), a member of the National Alcohol Tax Coalition, which includes the American Medical Association and the American Association of Retired Persons. The coalition wants the tax on the alcohol content of beer, wine and liquor equalized, pushing all three to $16 per proof gallon. CSPI has for the first time hired an outside lobbying firm, Capitol Associates, Inc., to talk up the tax.

One thing that's always made it hard for Washington to oppose the alcohol and tobacco industries is their adept way of spreading their money widely and visibly. At the recent Vancouver summit between Mr. Clinton and Russian President Boris Yeltsin, Philip Morris subsidiary Benson and Hedges paid for a $100,000 fireworks display. The biggest contribution to the Clinton-Gore Presidential Transition Planning Foundation came from a group of Gallo Wine family members. Miller Brewing Co. is a founding sponsor of the Thurgood Marshall Black Education Fund. The tobacco industry gives tens of millions of dollars annually to the ACLU, the NAACP, the Boy Scouts, the Congressional, Black Caucus and dozens of other groups.

Four industry powers -- RJR Nabisco Inc., Joseph E. Seagram & Sons Inc., Philip Morris and U.S. Tobacco Co. -- were among the top 10 "soft" money donors to the Democratic and Republican parties in the past election, according to the Center for Responsive Politics. Tobacco and alcohol political action committees together gave nearly $2 million to congressional candidates in 1991-92, including more than $100,000 to Sen. Wendell Ford, D-Ky.

In early March, Rep. Charles Rose, D-N.C., sometimes known as "Mr. Tobacco," led a group of House tobacco-state Democrats to the White House for a meeting with legislative affairs director Howard Paster. Twenty-five House members signed a letter to Mr. Clinton warning him of the economic dislocation that could occur if tobacco was hit with much heavier taxes.

And tobacco-state members are mobilizing their constituents. In recent meeting with concerned tobacco farmers in his district, Rep. Tim Valentine, D-N.C., counseled, "When you send a letter to a congressman, include a check," according to an account in the Raleigh News and Observer.

But several lawmakers who haven't supported higher sin taxes in the past are sounding more equivocal. Senate Majority Leader George Mitchell recently said, "I think there will likely be some increase in the cigarette tax" as part of health care reform. Even Mr. Rose realizes that some tax increase is inevitable, an aide said.

"The handwriting is on the wall for an increase in tobacco," said a key Finance Committee aide. Health-wise, alcohol has a slightly better reputation, and the revenue to be raised from it isn't as substantial.

Both industries are attempting to shift the debate, arguing that policy-makers will have to come up with a broader-based, longer-term revenue source to pay for health care reform.

Maybe, but for now, sin taxes look like they are going to play a role in the mix.

Viveca Novak is a correspondent for National Journal, where another version of this article appeared.

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