NATO battles proposed federal tax hike

A federal tax hike on tobacco is the wrong way to fund states’ health insurance programs for children, Thomas A. Briant, executive director of the National Association of Tobacco Outlets (NATO), told NPN MarketPulse in an interview.

“NATO is very concerned about the impact of a large federal cigarette and tobacco tax increase on its members, including retailers, wholesalers and manufacturers,” Briant said. “We continue to urge members to contact their U.S. senators and urge them to find an alternative source to fund the state children’s’ health insurance program.”

Smokers would pay an extra 61 cents per pack of cigarettes to expand health insurance to about 2 million children under a tentative deal between Democrats and Republicans on the Senate Finance Committee, according to a July 10 article by Richard Wolf in USA Today. The increase would boost the federal levy from 39 cents per pack to $1, and would raise about $35 billion over five years to pay for the largest expansion of the Children's Health Insurance Program (CHIP) since its creation a decade ago, according to the article.

Briant advised that retailers seeking to express opposition to the proposed tax hike should visit the Web sites senate.gov and house.gov to identify and find contact information for their elected representatives. He said additional information can be found at the NATO Web site, natocentral.org.

NATO, based in Minneapolis, Minn., has sent a letter-to-the-editor to more than 300 major newspapers urging citizens to oppose the tax increases.

Here are portions of the letter:

This tax increase would reauthorize and expand the State Children’s Health Insurance Program (“SCHIP”). The SCHIP program has merit and provides funding to states to make health insurance coverage available for children. The real question that must be asked is what should be the revenue source for the program? Logic dictates that the funding source be broad based, stable, and fair. Excise tax increases on tobacco products meet none of these standards. Further, the magnitude of this proposed 156.4% tax increase will have severe economic consequences and could jeopardize the safety of retailers.

In a February, 2007 report titled “Budget Options”, the Congressional Budget Office (CBO) states that one direct financial impact from such a tax increase would be a significant reduction in sales of cigarettes and tobacco products. The CBO estimates that for each 10% increase in the price of cigarettes, consumption is likely to decrease by up to 5%. The $.61 per pack proposed tax increase translates into an average 14% price increase per pack which equates to an estimated 6% sales decline.

A direct consequence of this sales decline will be a high likelihood of retail stores going out of business and a loss of retail jobs. This has already occurred in Minnesota where twenty tobacco stores and a 107 year old tobacco wholesale company have closed their doors in the past year as a result of a recent $.75/pack state cigarette tax increase and a doubling of the tobacco products tax rate. This loss of jobs is confirmed in the CBO report which concludes that “higher [cigarette and tobacco] excise taxes would lead to reductions in income and payroll tax revenues.”

Moreover, many states have learned that an excessive increase in cigarette and tobacco taxes results in a shift to black market cigarette trafficking and an elevated risk of store robberies because of the higher street value of cigarettes and tobacco products. Just two months ago, Iowa enacted a $1.00 increase in the cigarette tax and more than doubled the tobacco tax rate. The Des Moines Register newspaper reported on May 21st that a tobacco wholesale warehouse was broken into by four suspects who stole 500 cartons of cigarettes and that cigarette thefts in Des Moines are rising. During June the newspaper reports that thieves have targeted more stores carrying away numerous cartons of cigarettes.

Funding expansion of SCHIP through increases in tobacco taxes is not broad based since it would be paid by only 25% of the adult population who choose to purchase perfectly legal tobacco products. It is not stable since by its very adoption it will just further accelerate what is already a declining tax base. Everyone knows that tobacco use is declining every year. It is not fair, since as the CBO report points out, cigarette taxes are one of the most regressive forms of taxation and impact lower income Americans because they “are more likely to smoke than people from other income groups.”

...Congress needs to find a more broad based revenue source to fund the SCHIP program and not seek to penalize any further the 25% of our fellow citizens that choose to use what is a perfectly legal product. Congress needs to find a revenue source for SCHIP that will not put law-abiding, hard working retailers and their employees in harms way.

[Editor’s note: The complete text of the letter is posted on the NATO Web site: natocentral.org.]