When the Democratic leaders of Congress sat down with President Bush in 1990 to hammer out a budget agreement, they insisted that the deal not impose any additional tax burdens on the poor. After every new twist in the negotiations, the conferees would pause as their staff economists compiled tables detailing how each income category would fare under any given combination of taxes. And although the final agreement did include higher “sin taxes” on cigarettes and liquor—which hit low-income taxpayers disproportionately—the Democrats insisted that this regressive burden be offset by an expansion of the earned income tax credit, a subsidy for the working poor.
This concern with distributional equity was very much in keeping with the Democratic Party’s historic role as protector of the economic underdog. Now, however, something very different is happening. The Democratic Party, with the help of some Republicans, has decided to tax the dickens out of cigarettes.
Since everybody seems to have forgotten, let’s refresh our memories about who pays cigarette taxes. Any sales levy that exacts the same tax from all comers, regardless of ability to pay, is inherently regressive. A sales tax on bread, for example, would exact a relatively higher toll on the poor than on the wealthy, because the poor must spend a higher percentage of their income on food. A cigarette tax is even more regressive than a bread tax, because the poor tend to smoke more heavily than the wealthy. Adding $1.50 to the cost of a pack of cigarettes would cost taxpayers who earn less than $10,000 per year four percent of their income; by contrast, it would cost those earning more than $200,000 per year just one-tenth of a percent of their income, according to Citizens for Tax Justice, a liberal tax-research group.
Ordinarily, such punishment of the lower classes would evoke stirring denunciations from the Ted Kennedys and Marion Wright Edelmans of the world. Yet nothing of the sort has happened. On the contrary, liberal Democrats are championing cigarette taxes far larger than the ones they grudgingly and conditionally acceded to in 1990, and they have made no effort to counterbalance the huge costs such a tax will impose upon the poor. Indeed, they have blithely shrugged off the clear class ramifications of taxing tobacco and, with barely a word of protest, proceeded headlong toward a dubious experiment in government paternalism. Conservatives with ties to the tobacco industry—who are practically the only ones speaking out against this effort—have lambasted this proposal as liberalism run amok, but it would be better described as liberalism betrayed.
Why are the Democrats so eager to soak the poor? The obvious and conventional explanation is the lure of easy financing for new spending programs. Under the current budgetary rules, you must find a source of funding for any new spending initiative. That is, any new spending must be offset by equally large spending cuts or tax increases. In practice, this means that any new spending cannot pass without upsetting some political constituency. But opinion polls show that the public approves of taxing tobacco. Thus, a tobacco tax would provide Democrats with a politically easy way to finance their new domestic agenda.
President Clinton points to the prospect of new spending as a justification for the regressively of the cigarette tax. Democrats have made just this kind of a bargain before. Social Security is financed by a regressive payroll tax, yet Social Security distributes its benefits progressively enough that low-wage workers still get a good deal. The cigarette tax could pass the fairness test if the White House could devote the revenues toward sufficiently munificent ends. For example, if the money coming in through the tobacco tax went back out primarily as subsidies to provide universal health coverage, day care for parents on workfare, or an expansion of the earned income tax credit, liberals could justify it as part of a progressive bargain.
But that’s not how the money will be spent. Clinton would spend about one-third of the tobacco money on anti-smoking programs, compensation for tobacco farmers, and unrestricted funding for state governments (as promised under the tobacco settlement). Of the remaining two-thirds, the lion’s share would go toward increased funding for medical and scientific research—a worthy expenditure, to be sure, but not one that would disproportionately benefit low-income groups. Less than one-quarter of the cigarette-tax revenues remain for programs that mainly help the less prosperous.
Even that paltry share will almost certainly shrink by the time Clinton’s budget makes it through Congress (assuming it can). Republicans insist that any cigarette-tax revenues should pay for other tax cuts. And the tax cuts they propose—correcting the “marriage penalty” or giving tax deductions to people who buy their own health insurance—are all skewed heavily in favor of upper-income groups. In fact, devoting the cigarette-tax revenues to GOP-favored tax cuts might be the only way to win conservative support for a tobacco settlement. “If I could ensure that, every dime of a tobacco tax increase would go towards a tax cut, I might support it,” wrote House Whip Tom DeLay in a Wall Street Journal op-ed. (This is why Republican complaints about the regressively of the cigarette tax shouldn’t be taken with a grain of salt; their true fear isn’t that the tax is too regressive but that the revenues from it won’t be spent regressively enough.) In any event, the final product of any tobacco deal approved by Congress will likely raise taxes at the bottom of the income scale and lower them at the top.
To the White House—and other supporters of the bill—these distributional consequences of higher cigarette prices are unpleasant but rather beside the point. “It’s more complicated than a tax distribution table,” says Clinton adviser Bruce Reed. “The reason we’re for the price increase is that it’s the most important step to keep young people from starting in the first place.”
The premise that higher cigarette prices will dramatically reduce youth smoking certainly makes intuitive sense—in an efficient market, raising the price for a product will lower demand for it. And the administration’s theory is, in fact, supported by a considerable body of research. Nonetheless, it is a much less certain proposition than the White House and its allies make it out to be.
The relevant factor in this matter is “elasticity,” which is an economics term that describes how much a given kind of behavior can change in response to incentives. Behavior that is apt to change is elastic. Rigid behavior is inelastic. The question of whether taxes can keep kids away from cigarettes, then, boils down to whether or not teenagers’ demand for cigarets is elastic—i.e., whether or not a rise in the price of cigarettes will cause the demand for them to drop. If teen cigarette demand is elastic, a cigarette tax could reduce youth smoking. If it is inelastic, then a tax won’t work.
Studies have shown that states with higher cigarette taxes have lower rates of teen smoking. Thus, researchers have long deduced that the demand for cigarettes among youths is elastic. In other words, higher taxes raise the cost of smoking and cause the youth-smoking rate to drop. The standard explanation for this is that, since teens are not yet addicted to nicotine, and since they don’t have much money, higher cigarette prices will discourage them from buying cigarettes.
Researchers at Cornell University, however, have recently identified a common flaw in all these findings: States with high cigarette taxes also tend to be the ones with strong anti-smoking sentiment. States where the public approves of smoking, on the other hand, do not institute high taxes on cigarettes in the first place. If this is true, then cigarette taxes are not the independent variable that determines whether or not teens smoke. Instead, a third factor—general attitudes toward smoking—is determining both the level of taxation and the level of teen smoking.
For instance, the major tobacco-producing states—North Carolina, Kentucky, and Virginia—have the lowest cigarette taxes in the country, and eight graders in these states also smoke more than their counterparts elsewhere. Conventional thinking would interpret this fact as yet more evidence that low cigarette taxes cause more teen smoking. But it’s entirely possible that the reason kids in these states smoke more than kids in other states is simply that people in North Carolina, Kentucky, and Virginia are more tolerant of smoking. This tolerance also explains why these states have low cigarette taxes: People don’t dislike smoking as much, so they don’t want to tax it as much. Not only that: State governments want to do everything they can to protect demand for the local tobacco farmer’s crop.
Sure enough, when the Cornell researchers examined the relationship between cigarette prices and youth smoking in every state except North Carolina, Kentucky, and Virginia, the elasticity disappeared. Kids in the remaining low-tax states were not more or less likely in smoke than the kids in high-tax states.Hence, the study found, raising the cigarette tax would not do very much to curtail youth smoking.
This explanation makes sense once you think about how and why teenagers start smoking in the first place. Teen smoking is a matter of youth culture more than youth economics. Kids start smoking because of peer pressure, and most of them smoke, at most, just a few dozen cigarettes a week with their friends.Since each cigarette costs only about a dime, smoking doesn’t put much strain on a typical teenager’s budget—and it still wouldn’t, even if government raises the price of each cigarette by another nickel. How many teenagers, alter all, would be willing to risk their social standing to save a few bucks a week?
The Cornell study was not the first to cast doubt on the notion that cigarette taxes can dissuade kids from smoking. But it was the first to highlight the flawed assumptions of the studies that suggest otherwise. As researchers have looked more closely at youth smoking, they have generally grown less certain that taxes can keep kids from smoking. “Gradually, the elasticities have fallen,” observes Jane Gravelle, an economist with the nonpartisan Congressional Research Service.
Given that the smoking propensities of youths remain mysterious, it seems strange to tax the 98 percent of smokers who are adults in order to experiment on the two percent of smokers who aren’t. Here we arrive at the philosophical crux of the Democrats’ position. The White House believes higher cigarette prices will induce some adult smokers to quit and others to smoke less heavily, thereby improving their health.
This is an altogether new kind of justification for regulating cigarettes. It is not like banning smoking in the workplace, which protects nonsmokers from being forced to breathe in their coworkers’ secondhand smoke. Nor is it like restricting tobacco advertising, which protects children (who cannot always make informed decisions) from a dangerous product. Rather, the intent is to protect adult smokers from themselves. As a Treasury Department official concedes: “Quite frankly, we’re making a paternalistic argument because it’s an addictive product.”
The claim here is simple. Since nicotine is addictive, adult smokers cannot rationally choose how much they smoke. For purposes of the decision whether or not to smoke, they are, in effect, children. Therefore, the government will try to induce them to quit for their own good. “Our view is that smoking is a regressive habit,” argues Reed. The poor will pay more taxes, the Treasury Department official acknowledges, but they “will gain disproportionately in health terms.”
But there’s a paradox. The people gaining in health terms aren’t exactly the same people who pay the tax. Those who enjoy the most health benefits—the ones who reduce their smoking—will pay the least tax. Those who continue their smoking habit will get no health benefits at all but will pay the most tax.The minimum-wage worker who spends another five percent of his income on tobacco taxes will hardly be comforted by the knowledge that his neighbor who quit has added another couple of years to his life expectancy.
Second, the Clintonites are having it both ways about addiction. The addictiveness of smoking may offer a rationale for protecting smokers from themselves, but it undercuts the rationale for taxing them. Why punish people for behavior they can’t control?
The overriding problem with paternalism is that it overstates the meaning of addiction. Nicotine may be addictive, but that doesn’t mean smokers have lost all free will. One-half of all adults who have ever smoked have quit. As Harvard law professor W. Kip Viscusi shows in Smoking: Making the Risky Decision, smokers fully comprehend the health risks of cigarettes. Viscusi conducted surveys about the probability that cigarettes could cause lung cancer, for instance, and found that a large majority of the public overstates the risk of contracting lung cancer from smoking. Smoking, then, is not quite a fully rational decision to trade health and longevity for the pleasure of tobacco, but neither is it a purely compulsive tic of the helpless addict.
The tobacco industry has cheapened the language of individual freedom. But, in the end, smoking really is largely a personal decision. It’s fine to regulate cigarette advertising or to protect nonsmokers from secondhand smoke. These activities have broad effects. Liberalism also holds, however, that individuals should be able to make their own decisions on matters that only affect themselves. The hard choices come when the demands of economic justice and personal liberty collide. On the matter of cigarette taxes, the two values dovetail. How did liberals wind up on the other side?
This article appeared in the May 18, 1998 issue of the magazine.