Tobacco tax plan lights up controversy - Bill Clinton's plan to quadruple tax on cigarettes

Insight on the News, Nov 8, 1993 by Brian Robertson

Summary: The White House is counting on a big increase in the tobacco tax to help pay for health care plan. Tobacco-growing states are the most concerned about the economic impact, but there could be effects beyond the Southeast as a black market breeds smuggling and lost revenue.

When Hillary Rodham Clinton banned smoking in the White House, America's struggling tobacco farmers knew they were in a for a rough four years. In September, they found out just how rough.

The Clinton administration's plan to overhaul the nation's health care system includes a hefty new excise tax on tobacco -- an increase of between 75 cents and $1 from the current 24 cents per pack of cigarettes -- as part of its financing. While this unprecedented increase has won applause from the influential anti-smoking lobby, opponents warn that a tax of this magnitude could devastate an industry vital to the Southeast and give rise to a level of black market activity that hasn't been seen since Prohibition. These critics believe that the administration is taking an enormous economic and social risk in a misguided effort at deficit financing and social engineering.

It was clear from Mrs. Clinton's comments before the House Ways and Means Committee that there is more to be proposed tax than "revenue enhancement." Reporters and legislators alike had high praise for the first lady's eloquence and political dexterity -- she even elicited an ovation from jaded congressmen -- but Republican Rep. Jim Bunning of Kentucky appeared less impressed than his colleagues. When, on Sept. 28, Bunning asked her why tobacco was being singled out while other potentially harmful substances, such as sugar and alcohol, were spared, she evaded the question, reokting that there was "no free lunch in this program" and insisting that "everybody is egoing to pay." She added pointedly, "If there is a way that you can ever come up with to tax the substances like the ones you've just named, we'll be glad to look at it."

But Mrs. Clinton already had answered the congressman's question during the previous day's testimony. "Tobacco is the only product that, if used as directed, can have such damaging health consequences," she said. "Neither alcohol nor caffeine nor the others, if used in moderation or in small amounts, are proven to have the same kind of effects."

That kind of talk scares North Carolinians. "I can't go along with any argument when it means destroying an entire industry," says Pender Sharp, a tobacco farmer in Sims. "A $1 increase in cigarette taxes would probably put half the tobacco farmers in this area out of business, and that's only a small minority of the people that would lose their jobs."

According to Sharp, the income produced by tobacco farming and cigarette manufacturing is regenerated throughout the state economy. "We operate an average-size farm, and we put about $1 million each year into the local economy in the form of wages and buying goods and services to operate the busqiness," he says. "If we go down, that takes a big slug of money out of the economy." Many industry studies have reached the same conclusion, estimating that a $1-a-pack increase in the cigarette tax would mean a 17 percent decline in cigarette sales and a loss of close to 400,000 jobs, more than 100,000 in the tobacco industry alone.

Those kinds of forecasts in turn scare lawmakers who represent tobacco-growing areas. "Singling out tobacco for tax increases of this magnitude will do more damage to the economy in the Southeast U.S. than Sherman's march to the sea," argues Bunning. Sources on Capitol Hill acknowledge that a vote for any tax higher than 25 cents a pack would be political suicide for those whose districts depend on tobacco.

"I guess it comes down to how much they need our vote for the health care bill," says North Carolina Democratic Rep. Tim Valentine. If the vote is close, as it was on the president's budget, the administration might have to negotiate. "The White House learned a lesson worth four years in college when they lost the vote on the economic stimulus package," says Valentine. "That time they sent it up to the Hill with the instructions 'Don't touch it!' and it went down in flames. This time they might be a little more open to changes."

The budget vote itself underscores how much the administration needs the tobacco vote. An obscure provision of that bill required that 75 percent of the tobacco used to make cigarettes in the United States be grown domestically, effectively limiting the import of cheaper, foreign-grown varieties increasingly favored by domestic manufacturers. Despite denials from all parties that this "domestic content" legislation was included by the administration to secure the tobacco bloc, some find it more than coincidental that, when the budget passed by just one vote in both the House and Senate, 30 out of 34 House Democrats from tobacco districts voted in its favor.

The administration may be less willing to negotiate on the tobacco levy. Congress already has expressed deep concern about the package's financing, and the president is counting on the new tax to generate $17 billion a year to cover costs. Unlike other possible to cover costs. Unlike other possible taxes, a higher widespread support among the three out of four Americans who don't smoke, as well as powerful backing from anti-smoking lobbyists, who already have won major tax battles in states such as New York and California. And because lighting up is increasingly regarded as an antisocial activity, tobacco is a much easier target for a "sin" tax than alcohol. Also, the impact of a tobacco tax would be felt mainly in the Southeast (although convenience stores nationwide make up to one-fourth of their income from tobacco sales) whereas a stiff new tax on alcohol would be felt by a range of businesses all over the country.