Senator Jim Webb (D-Va.) on Tuesday had introduced an amendment to the SCHIP bill that would substitute the 61-cents-per-pack cigarette tax increase with a tax on carried interest, which are profits that hedge fund managers receive as compensation, according to the most recent PMAA News from Capitol Hill newsletter from the Petroleum Marketers Association of America. The amendment would subject cigarettes to a 37-cents-per-pack increase instead of the 61-cents-per-pack increase.
The lower tax would generate $11.2 billion in revenue over five years, said Webb. He argued that most of the states already impose and may raise their excise taxes on cigarettes, in addition to the currently proposed 39-cents-per-pack federal tax increase, which would burden lower-income households who are more likely to use tobacco products.
PMAA has talked to Webb's staff and is awaiting a response from Senate Majority Leader Harry Reid (D-Nev.) on the fate of the amendment, it said.
A final vote on SCHIP is expected today.
Statement of Senator Jim Webb
January 27, 2009
Amendment to the [State] Children's Health Insurance Program Bill
"I am here to speak in favor of this legislation. It's a very important piece of legislation that is long overdue. I would like to offer an amendment as I am very concerned about the way that this legislation is going to be funded. We all have our own issues with respect to whether tobacco should be used or not used, but to fund an entire program based on tobacco is not the way to move forward for a number of reasons.
"I am offering an amendment that will help offset this highly regressive 61-cent-per-pack increase in the cigarette tax that is being used to fund this bill and to add onto the bill a tax on carried interest, which is the compensation that is currently received by hedge fund managers.
"This proposal would generate $11.2 billion in revenue over five years. Tobacco taxes would thus be raised by a more reasonable 37 cents a pack to make up for the shortfall of the revenue being generated by this amendment and the costs of the [S]CHIP Reauthorization program. Tobacco is already federally taxed at 39 cents per pack for the [S]CHIP program. All 50 states and the District of Columbia also impose an excise tax on cigarettes above this tax. For instance, my state of Virginia adds 30 cents on top of the present tax and in these difficult economic times, many states are considering an increase on their state excise tax.
"So we would have with the amendment that I am offering the 39-cent federal tax that is already in place on a pack of cigarettes, an additional 37-cent tax instead of an additional 61 cent tax, plus the state taxes on cigarettes and a big proportion of this, all of the federal tax, going to fund a health program.
"I would like to be clear, there is no question in my mind about that fact that we do need to reauthorize and expand this program, but I do not think that it is proper to fund this program on the backs of people who--for better or worse--smoke cigarettes. I am a reformed smoker; many of my contemporaries here in the Senate are reformed smokers. I'm not encouraging anyone to smoke cigarettes. I hope you don't.
"Tobacco taxes are already a popular source of revenue. It does not change the reality that the tobacco tax is regressive.
"As the Congressional Research Service said, "Cigarette taxes are especially likely to violate horizontal equity and are among the most burdensome taxes on lower-income individuals. Only about a quarter of adults smoke, and less than half of families have expenditures on tobacco. Tobacco is more heavily used by lower-income families than are other commodities, and it is unusual in that actual dollars (in addition to percentage of income) spent on tobacco products decline in the highest income quintile."
"My amendment will help soften the blow of the increase of the cigarette tax.
"Let me provide some background on carried interest. A partner of a private equity or hedge fund receives two different types of compensation. First, hedge fund managers receive management fees that are linked to the assets they oversee.
"Second, they receive what is called "carried interest," which is compensation they receive based on the percentage of the profits generated by the assets they manage.
"Currently, carried interest is taxed at a capital gains tax rate. Many economists, including Peter Orzag who is now a member of the Obama administration, noted in his 2007 testimony, that carried interest is "performance-based compensation for management services provided by the general partner rather than a return on financial capital invested by that partner."
"Given that carried interest is performance-based compensation, it makes sense to tax it as ordinary income. This compensation has been earned by many of the same people who helped bring about the present financial crisis. The Financial Times stated recently, these managers "have made fabulous sums in recent years." Given the need to pay for children's health insurance, it makes more sense to have these persons, who are better positioned to pay for it, pay a greater percentage of the cost.
"When it comes to taxing carried interest as ordinary income, there is a wide acceptance in support of this proposal among thinkers and editorial writers across the country.
"The Financial Times editorialized, "This repair should be done at once." They editorialized in that manner two years ago.
"I have a string of editorials that support the idea of closing this carried interest loophole as a matter of fairness that I would ask to be entered into the record at the end of my statement. They include editorials from The Washington Post, The New York Times, USA Today, andThe Philadelphia Inquirer.
"The Washington Post in 2007 in reference to this particular tax break said this, "The only mystery is why Senate Democrats don't have the good sense to grab onto this as their centerpiece domestic issue as they head into the 2008 campaign. It's hard to think of an issue that better taps into the public anxiety about the markets and the economy, the anger about income inequality, or the disgust with a political system that bends to the will of powerful interests." The Washington Post continued, "This is a make-or-break issue for Democrats. If they can't unite around this issue, then they aren't real Democrats and they don't deserve to govern."
"The New York Times in 2007 talked about this issue, mentioning 'with income inequality surging along with the need for tax revenue, supporters rightly conclude that it is untenable for the most highly paid Americans to enjoy tax rates that are lower than those of all but the lowest-income workers. Congress will achieve a significant victory, for fairness and for fiscal responsibility, if it ends the breaks that are skewing the tax code in favor of the most advantaged Americans.'
"There are others and as I mentioned I will insert the full text of these editorials at the end of my comments. I also should point out that President Obama supported throughout his campaign the idea of taxing carried interest as ordinary income.
"So the choice is this: do we help fund this program, which we all agree is critically necessary, with a well-deserved tax adjustment for some of those who are the most capable of absorbing a new tax or do we take money exclusively from tobacco, causing people who in large part are in the same economic circumstances as the beneficiaries of the [SCHIP] to foot the bill?
"Let's think for a moment about the irony of that. We are taxing a practice that we deem unhealthy in order to fund a health program. We supposedly want this practice to go away, but if it goes away we are not going to be able to fund our health program.
"Mr. President, we need to find a way to fund health care that is sustainable and fair. A declining revenue source is not sustainable.
"I hope my colleagues will join me in supporting this measure which will partially offset the cigarette tax that is a part of the bill and I would again like to express my strong appreciation to Chairman Baucus and others such as my colleague from Rhode Island who have worked so hard on this bill and to address our those in our system who are most needful of medical care.
And with that I yield the floor."
[Editor's Note: A free website-www.stoptheFETincrease.com-hosted by Altria Client Services and Philip Morris USA provides a simple, fill-in-the-blank form to allow retailers to voice their displeasure with the bill. Retailers can also call a hotline at (866) 527-4494 to reach out to their legislators.]
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.