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1 Patrick Fleenor, Tax Fairness Would Suffer under Senator Smith's Cigarette Tax Hike 1 (2007)

handle is hein.taxfoundation/fficxz0001 and id is 1 raw text is: TAX
March 30, 2007
Tax Fairness Would Suffer under Senator Smith's Cigarette Tax Hike
by Patrick Fleenor
Fiscal Fact No. 82
On March 23 Senator Gordon Smith (R-OR) proposed raising the federal cigarette tax from 39
cents to $1.00 per pack. This amendment to the budget resolution would force cigarette smokers
to directly fund increases to the SCHIP program, a large government health program that buys
insurance coverage for the children of families that earn too much to qualify for Medicaid.
Of course, all children should have health insurance, but the funding source that Senator Smith
has chosen--cigarette taxes--is far and away the federal government's most unfair tax.
Tax Equity: How Fair Are Cigarette Taxes?
Economists usually evaluate tax equity, or fairness, in two dimensions: horizontal equity and
vertical equity. A tax is considered horizontally equitable if people who earn similar incomes
pay similar amounts of the tax. The reasoning behind this notion is straightforward: funds spent
on a broad swath of the general public should likewise come from taxes levied on a broad swath
of the population, and people with similar means should pay similar taxes. By this standard,
cigarette taxes are an unfair tax because they fall only on the small share--about 23 percent--of
the public that smokes. Nonsmokers pay nothing.
Vertical equity calls for tax burdens to rise as individuals' incomes rise. This notion is more
controversial than horizontal equity because many Americans believe taxes should take the same
percentage from all income levels. But on one point most agree: tax burdens should not rise as
incomes fall. Yet existing federal taxes on tobacco do exactly that. In fact, under current law,
individuals in the lowest-earning 20 percent of households--the first quintile--bear cigarette tax
burdens that are 7.5 times higher than those in the top quintile.! Senator Smith's plan would only
exacerbate this unfair distribution of the tax burden.
Fiscal Incidence of the Gordon Plan
Figure 1 shows how $20 billion in additional SCHIP spending would flow to households in
different quintiles. Households in the lowest quintile would receive $202 in additional spending
while those in the top quintile would receive $44.

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