DOUBTS VOICED ON GAIN FROM TOBACCO TAX

THE BALTIMORE SUN

WASHINGTON -- When White House officials began floating ideas for health care reform last year, one trial balloon had no trouble staying aloft: a 75-cent-a-pack tax on cigarettes that would raise $11 billion a year. Catching the growing anti-tobacco mood of the country perfectly, the Clinton administration's proposal was seen as an easy way to raise money, discourage an unhealthy habit and offend relatively few voters.

"There is a changing public attitude toward smoking. It's no longer seen as just a personal decision but a real health problem for all of society," said Rep. Benjamin L. Cardin, a Baltimore Democrat on the House Ways and Means Committee who recently voted for a $1.25-a-pack increase in the federal tobacco tax.

But Congress' near-unanimity that tobacco must be taxed more -- and taxed hard -- raises some troubling questions.

For example, a tobacco tax is one of the most regressive taxes possible, with the poor paying a disproportionate amount. Another problem is that smokers may already be paying -- or at least be close to paying -- their economic cost to society, so a new tax would unfairly single out smokers to pay for programs that benefit all Americans.

More fundamentally, a 75-cent tobacco tax may not be as effective as advertised in its two main goals: raising money and discouraging smoking. While a tobacco tax does cut smoking, policy experts believe that only draconian taxes really slice into smoking rates. And any decrease that does take place will cut projected tax revenues, leaving less than expected for health care programs.

Indeed, tobacco contributes up to $100 billion to the U.S. economy. Although eliminating tobacco might be a long-term benefit to society, it would also cause gaping holes in many state and local budgets, an issue that the government has not yet begun to address.

On top of these policy problems is a more basic question: Is Washington, through its taxes, anti-tobacco rhetoric and barrage studies on smoking's evils, setting the stage for a new round of de facto prohibition?

"I think there is a concern that we're trying to do something [ban tobacco] indirectly that we're not willing to do directly. We shouldn't do through taxation what we are not willing to do outright," Representative Cardin said. "We have to be very careful."

Whatever the merits of the tobacco tax, most public policy analysts see it failing its primary task of raising revenues for two main reasons.

First, it is not indexed to inflation. This means that, as time goes by, the tax will provide health care with less and less buying power. Second, the tax's long-term effect is also whittled away by the presumed decline in smoking that will result from higher taxes.

Taken together, the Congressional Research Service estimates that after six years the 75-cent tax will bring in an adjusted 62 cents, putting a $1 billion hole in health care and requiring new taxes.

On top of that, the tax is widely recognized as unfair. It imposes 3.6 times the burden on poor people as on average income-earners. Not only do the poor smoke more than the rich, but smoking is a relatively fixed cost, so it eats up a larger percentage of a poor person's budget than a rich person's.

Another concern is that a tobacco tax violates a tenet of public policy: fairness. Dr. Philip Cook, an economist at Duke University who specializes in excise taxes, said taxation should not make a minority pay for a program that is supposed to benefit all Americans.

"Generally you want programs that benefit all of society to be borne by as broad a cross-section as possible. The tobacco tax does not do that," Dr. Cook said.

Besides burdening one group in society, the tax is expected to put a hole in state budgets. Federal and state governments rely on tobacco for $39 billion in tax revenue. If the federal tax &L; reduces smoking as advertised, state governments will see an immediate $1 billion shortfall in their revenues, according to the Congressional Research Service.

Economists caution, however, that it would be unrealistic to overplay tobacco's tax contributions. Even if tobacco were to disappear because of government pressure, it would do so over a long period of time and not have a cataclysmic impact on the national economy.

Top estimate for tobacco's contribution to the U.S. economy, for example, is $100 billion, compared with the $5.2 trillion in goods and services produced here each year. On the very outside, tobacco accounts for less than 2 percent of the total economy.

And many economists argue that the $100 billion figure is inflated because it includes the wages and benefits of shopkeepers who sell tobacco. Several economic models show that these shopkeepers would probably be able to sell other goods if tobacco disappeared.

Of far more relevance -- and something that is ignored by most tobacco tax advocates in Washington -- is the tax's impact on the economies of rural counties and villages in the Southeast. There, tobacco is the dominant crop and even a 10 percent decrease in smoking could see hundreds of farmers put out of business.

"It's easy to overstate the importance of tobacco nationally, but impossible to overstate tobacco's importance locally. It is the economy of many local counties," said Ray C. Long, a University of North Carolina agriculture professor.

Regardless of the declines in revenues, proponents of the tax say it is important because it would reduce smoking levels among minors. Most experts agree that the tax would indeed discourage minors from smoking -- they are more sensitive to price increases than adults and usually aren't yet addicted to nicotine -- but say reductions would be modest.

Those who argue that a small increase can have a huge impact usually point to California, where excise taxes on a pack of cigarettes went up 25 cents a pack in 1989, and smoking rates have dropped 28 percent, vs. a national decline of 9 percent. Academics who have studied the situation in California point out, however, that it would be a mistake to attribute all of this decline to the tax because the state also began an aggressive anti-smoking ad campaign at the same time that the tax was increased.

"The tax probably accounted for about a quarter of the decline. A tax usually eats into the tobacco companies' profits more than it cuts smoking rates," said Stan Glantz, a professor of public health at the University of California at San Francisco and a pioneer anti-smoking campaigner.

To get dramatic decreases in smoking, especially among the young people that the California tax did not discourage from smoking, tobacco opponents concede that it would be necessary for a large increase in the tobacco tax -- along the lines of Canada's $3-a-pack increase between 1981 and 1993. That increase is credited with a 38 percent decrease in smoking and a 60 percent decline in teen-age smoking.

Such a hefty tax would not only be politically difficult to pass, but also encourage a black market in cigarettes. Much of the Canadian tax, for example, was repealed this year because of extensive smuggling.

If a tobacco tax is not the best way to raise a steady stream of revenue and is not the only way to reduce smoking levels, then why is a tobacco tax so popular in Congress?

One reason, as Mr. Cardin says, is that Congress and public opinion now believe that smokers cost society a lot of money. Once viewed as a personal decision that only killed the smoker, smoking now is seen as a menace to society.

So how much do smokers cost nonsmokers when they buy a pack of cigarettes?

According to the nonpartisan Congressional Research Service, an agency of Congress that analyzes public policy issues, each pack of cigarettes costs others 33 cents -- mostly in higher medical costs. The economic cost is lower than one might think, the research service says, for the brutal economic reason that cigarette smokers die 15 years earlier than nonsmokers, so use less Social Security, pensions and expensive old-age health care.

That study, however, probably underestimates the total costs to society, according to Will Manning, a health economist at the University of Minnesota who has written one of the few studies on the costs of smoking. The Congressional Research Service ignored passive smoking, which Mr. Manning said could easily add 20 to 30 cents on each pack of cigarettes.

Taken together, each pack of cigarettes probably costs nonsmokers the same or slightly more than the 50 cents that government already takes in -- the current federal excise tax is 24 cents and the average state tax as of last year is 26 cents.

So by some accounting methods, smokers cover their cost to society; other methods show that smokers owe some money, but far less than the proposed 75-cent tax.

The best explanation for the tobacco taxing vogue may be that tobacco is weak, said Dr. Tom Schelling, a professor at the University of Maryland who follows excise taxes

In other years, for example, the tax might have been beaten back by big tobacco companies, but they have been weakened by falling profits, which cut into their staff of lobbyists. Their support is also eroded in traditional tobacco-growing regions, many of which are now less dependent on tobacco.

A barrage of damaging government reports has also helped soften opposition; the Food and Drug Administration recently said, for example, that nicotine might have to be regulated like a drug.

Nationally, tobacco has become the focus of ferocious grass-roots opposition.

In April, for example, Lockheed Aeronautical Systems Co. announced that it would no longer hire smokers. It claimed that smokers are expensive, even though most studies clearly contradict this.

The contrast in Washington's attitude toward tobacco and alcohol is striking, even though study after study shows that alcohol imposes a greater burden to society than tobacco. The ** Congressional Research Service, for example, notes that alcohol does not pay its way in society -- it is responsible for billions through traffic accidents and domestic violence.

James Bennett, an economics professor at George Mason University who has published a book, "Official Lies," critical of Washington's manipulation of public opinion, said taxing alcohol would be too difficult. Smokers, by contrast, are a vulnerable minority.

"You tax tobacco and it's just a few Southern states. You tax alcohol and it's New York, California and every other state with a distillery," Mr. Bennett said. "Tobacco is under the gun because it's easy. That doesn't make it good public policy, but it makes it politically feasible. And that's what counts in Washington."

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