Tobacco Documents Online

Representative John M. Spratt, Jr. Statement Before the Committee on Ways and Means Hearing on the Financing Provisions of the Administration's Health Security Act and other Hea1=h Reform Proposals November 18, 1993 Mr. Chairman, and Members of the Committee: Thank you for granting me the opportunity to appear before you today to discuss issues relating to the financing provisions -- of the Administration' health care reform proposal.' When witnesses your Committee announced these hearings, you asked that focus on specific issue areas and specific questions = relating to those issues. With respect to the proposed tobacco =_ tax increase, you asked about the external costs of smoking, the health care cost-savings that might be associated with an increased tobacco tax, the possible effects of a .75 cent increase in the cigarette tax, and about the corresponding tax increase on-other tobacco products. Today I would like to focus on the third of these four questions, and discuss briefly some concerns I have regarding the effects of the proposed .75 cent increase in the federal excise tax on cigarettes. You have heard and will continue to hear from many Members -_ who feel that :an increase in the tax on tobacco products unfairly targets a single region of the United States, asks too much of a specific segment of the population, and threatens to wipe out a vital part of the economy in many states. I represent thousands of individuals who would be hurt by the tax contemplated by the Clinton health care package, and I have these same concerns. However, I would like to focus today on a different aspect of the - debate over the cigarette tax: the efficacy of the proposed tax. Let me say first that I think the administration has made a good faith effort to estimate the costs associated with its health care package, and it has been frank in discussing the short-term need to raise revenue even as long-term savings are contemplated. However, I am not convinced that one critical question has been adequately addressed: what if the revenue estimates are incorrect, particularly those associated with the tobacco tax increase? And how great is the risk that the tax on tobacco products tax will not raise the revenue forecast in the Health Security Act? = My concern stems from what I see as confusion over the purpose of this tax: is it designed primarily to curb consumption or to raise revenue? It is well understood that tze - near-term costs of the Administration's health care reform package will require a significant amount of new revenue, and by extension, a stable source of that revenue. However, if the tobacco tax is designed primarily to influence behavior --- as its "sir_ tax" label implies, and as the size of the tax would -Q? CD suggest --- then I believe it is reasonable to question its va?:le as a revenue raiser. Put simply, when a sin tax works, it ~ reduces consumption. The better it works, the less revenue it w raises. This may be an effective way to influence the ~ consumption of a given product, but it is not the formula for a stable source of new revenue. ~

Represe=ative John M. Spratt, Jr. November 18, 1993 =. Page 2 i_ _s my understanding that the Administration and the Congressional Budget Office have made reasonable estimates of ~:e reduced demand which will accompany the proposed tax increase. Nonetheless, it is difficult to predict just what a 300% increase in the c=gare=te tax will do to consumption. I believe ,...is _acrease, from .24 cents to .99 cents, is of a sufficient maanitude as to call into question its ability to bring in a predictable amount of new revenue. The justification for the proposed tax hike on cigarettes is that cigarette smokers place a heavy burden on the health care system, and as such, it is fair to say the tax is punitive in nature. Now, it may be reasonable to dispute the external costs of cigarette smoking --- and I commend the Committee for exploring this issue --- but it would be unreasonable not to acknowledge the premise on which this "sin tax" is based. As a result, the tax will reduce consumption, BY DESIGN. Yet this function of the tax will also serve to weaken it as a revenue producer, which is an equally important role for it to play in the health care reform package. I would recommend that Committee and the Congress give serious consideration to lowering the amount of the increase in federal tobacco taxes. I believe the excise tax on cigarettes and other tobacco products should be lowered to a level where we can be more certain that they will function as reliable revenue producers. Any projected revenue shortfall could be offset with another modest excise tax, perhaps on hard liquor. In sum, if a punitive tax is to function as a stable source of significant revenue, it should be more modest than what the Administration has proposed. A tax of the current magnitude will not only be discriminatory and disproportionate in its impact, but it may well fail to raise the necessary revenue, precisely because of its function as a hindrance to certain behavior.