In the SCHIP debate, one piece that opponents put forward was that the payment for SCHIP was to be increasing regressive tobacco taxes. The Tax Foundation points out that unlike past discussions of increasing tobacco taxes, this time it was argued that increasing taxes on the poor would be a good thing. The Center for Budget and Policy Priorities argues:

While low-income adults are more likely to smoke than those with higher incomes, studies show they also are more likely to quit or cut back on smoking when they have to pay more for cigarettes. Thus, a tobacco tax increase would reduce smoking more effectively among low-income individuals than among those at higher income levels. In fact, more than three-quarters of the smokers who would be expected to quit in response to the 61 cents per pack cigarette tax increase in the bipartisan legislation have incomes below 200 percent of the poverty line.

That makes sense -- 3/4 of those who would respond to an increase in cigarette prices would be those who are low income, therefore more sensitive to price changes. But the Tax Foundation's analysis shows that, if you assume 18 of the 45 million smokers in America are poor, and that the elasticity of demand to a change in the price of cigarettes is approximately 0.2 (TF cites the American Cancer Society as its source for that -- when I look at for example this CBO survey I see other numbers, particularly for the young, that would be higher) then we have less than 1.5 million smokers quitting, of which 1.1 are poor. So 94% of smokers who are poor will pay the tax.

The howler, though, is this line from the CBPP:

Since three out of every four smokers expected to quit because of the tax increase would be low-income, most of the economic and health benefits of quitting would go to low-income families. By spending less money on cigarettes (including the taxes on cigarettes), those low-income families with an individual who stops smoking would free up funds for family needs such as child care, utilities, and food.

On that basis, the Tax Foundation says, why not raise taxes higher? My reaction is, if you are decided that a single dollar spent on child care, utilities and food makes you better off than any amount of money spent on tobacco, why not just prohibit them? Or better, put them in government stores and have potential purchasers prove they have the income and health insurance to support their habits? (Full prohibition would kill any number of public expenditure programs, so we can't have that.)

This decision that the marginal rate of substitution between tobacco and other goods for the poor is infinite shows the arrogance of public policymakers. If the tax is large enough you get a behavior change but also a deadweight loss. Maybe that loss is small and there are enough externalities from smoking to make the tax worthwhile (if you want to get all Pigovian about it.) But the loss increases at an increasing rate with the tax rate. Meaning, these taxes are getting increasingly costly to society.

Labels: economics, health care