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Senate panel votes big tax hike on smokers

Is a targeted tax increase on cigarette buyers the right way to pay for children’s medical insurance? The Senate Finance Committee voted Thursday to impose a 61-cent increase in the 39-cent per pack federal cigarette tax.
The hand of a smoker at a Las Vegas tavern. Nevada last year banned smoking at bars that serve food, and around slot machines at markets and convenience stores, part of a national trend to outlaw smoking.
The hand of a smoker at a Las Vegas tavern. Nevada last year banned smoking at bars that serve food, and around slot machines at markets and convenience stores, part of a national trend to outlaw smoking.Isaac Brekken / AP file
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Steady your hands as you light that cigarette and get ready for a 156 percent tax increase.

The Senate Finance Committee voted Thursday to impose a 61-cent increase in the 39-cent per pack federal cigarette tax.  Four Republicans on the panel voted no; 17 senators including six Republicans voted for the tax increase.

If the full Senate and the House concur, it will result in more than a doubling of the tax on 47 million smokers.

On larger cigars the bill would impose up to a $10-per-cigar tax.

The purpose of the tax hike is to help pay for expanding the State Children’s Health Insurance Program (SCHIP), which insures 6.6 million children and teenagers whose parents have low incomes, but who aren’t poor enough to be eligible for Medicaid.

SCHIP expires if Congress doesn’t act before Sept. 30.

Supporters of the tax hike would need veto-proof majorities in both houses of Congress since President Bush has pledged to veto the tax increase.

Political calculations for 2008
But Republican members are aware that a Democratic president in 2009 — who might be interested in moving toward a national health insurance plan — would only need a filibuster-proof majority of 60 in the Senate.

And Democrats, now with 51 senators, might have that majority after the 2008 elections.

This calculus will make some GOP senators more willing than Bush is to strike a deal now on SCHIP — especially since GOP candidates for re-election can expect that in next year’s campaigns, their foes could run ads saying, “Call Sen. X and ask him/her why he voted against insuring poor children.”

“It's clear to me that this bill has huge momentum and it will not be filibustered," Finance Committee chairman Sen. Max Baucus, D-Mont., told reporters immediately after the committee vote.

As for a veto threatened by Bush, Baucus said, "I don’t think it really changes much. There are a few members of the Republican Party who will do almost anything the president suggests but there are many Republicans on this issue especially who are voting their own conscience.”

But Senate Minority Whip Trent Lott, R-Miss., one of the four Republicans on the panel who voted against the bill, predicted that there will be enough votes to sustain a veto.

“This is Hillary-care through the back door and if people want that, they should vote for somebody who will do that," Lott said.

“But, look, the American people elected a Democratic majority — and this is the kind of thing you're going to get, more tax increases and more spending. If that’s what the American people want then they can keep this bunch in charge,” he said.

Lott's party-line interpretation was somewhat undercut by the fact that the tax increase won the votes of six committee Republicans, including ranking member Sen. Charles Grassley, R-Iowa. "This bill helps the kids that need to be helped," Grassley said, celebrating the committee's approval of the bill with Baucus.

Very unpopular in Kentucky One of the GOP senators up for re-election next year, Senate Minority Leader Mitch McConnell, R-Ky., said, “There will be alternatives offered on the bill when we get to the floor and we’ll see where the votes are.”

“SCHIP is a very popular program, but to this particular way of doing it, I think there’ll be substantial opposition,” McConnell said. The tax increase on cigarettes and cigars “would be very unpopular in my state. I have a very unusual state where we grow tobacco,” he noted.

The SCHIP debate focuses on two issues: first, is a targeted tax the right way to pay for children’s medical insurance?

And, is SCHIP a kind of precursor to a national health insurance plan?

First, the funding question. The incidence of smoking is greater among lower-income Americans than among higher-income people. The SCHIP program benefits low-income people. So would the Senate, in effect, be charging low-income people a “user fee” for a program that benefits them?

It’s not a perfectly aligned user fee, of course. Not all low-income smoke, not all smokers are low-income people, and not all low-income people participate in SCHIP.

Senators differ on the user fee question.

Connecting costs and benefits
Finance Committee member Sen. Gordon Smith, R-Ore., who voted for the tax hike, said it “connects the dots between a habit that drives up health care costs and health care for children. I see it as a two-fer: it discourages smoking and it connects costs and benefits.”

Smith said he does see the tobacco tax as a kind of user fee on smokers. “I see it that way, absolutely,” he said.

Another Finance Committee member, Sen. Olympia Snowe, R-Maine, said she hadn’t thought of the tax increase as a user fee.

Instead, she supports it “because it helps reduce the numbers who smoke, especially among young people. There is a correlation between driving up the cost of cigarettes and reducing the number of young people smoking. There are lots of consequences from smoking, such as low infant birth-weight. So it certainly goes in tandem with our initiative to fund children’s health insurance.”

It may be politically more palatable to impose a tax increase on a targeted population of 47 million smokers rather than on all wage earners. “Sure, it is,” said Sen. Richard Burr, R-N.C. “That it why it’s always an easy target to go after. Is it right? Does it address the deficiencies we have in the health care system? No.”

Effect on state revenues
One question state legislators will be mulling over is the effect such a large increase in the federal tax on cigarettes would have on state coffers.

States impose their own taxes on cigarettes, ranging from New Jersey's $2.58 per pack to seven cents per pack in South Carolina.

In 2006, states collected more than $14 billion in revenue from taxes they imposed on tobacco products. That amounted to about two percent of all state tax revenues.

Meanwhile, as NBC News correspondent George Lewis reported on the Today show this week, an increasing number of local governments are imposing bans on smoking, not only in restaurants and bars but in some outdoor venues as well.

This trend could lead to a decline in state tax revenues, as well to the projected revenues for SCHIP.

In addition to insuring children and teenagers in low-income families, SCHIP also covers about 600,000 adults.

With no movement yet in Congress on a national health insurance plan, SCHIP resembles a partial form of national health insurance, although one which varies in design from state to state.

The program allows states flexibility in limiting or expanding benefits. Several states have obtained waivers from the federal government to include adults, unborn children, and pregnant women in SCHIP.

“The way we’ve structured it, I don’t think that it is a vehicle for national government-provided health care,” said Smith. “I’m not for that. I don’t see much that the government does that I want it do more of for me — and certainly not when it relates to the health of my family. But the government can set some rules and the government can provide a safety net.”

Bush idea: tax breaks for individuals
Leavitt was on Capitol Hill this week to lobby senators on Bush’s proposed tax deduction for low-income people who currently have no health insurance, a tax break that would allow them to purchase a private health insurance plan.

Leavitt told reporters that Bush wants the SCHIP program re-authorized promptly.

But the administration objects to what it sees as an over-expansion of SCHIP. “It would take those who currently in the private market and insure them in the government-run market,” said Leavitt. “It would put middle-income and better-income families on public assistance.”