Tobacco Tax Still Seaworthy

Federal increase could still set sail even if Bush's S-CHIP veto torpedoes legislation

WASHINGTON -- The U.S. House of Representatives voted 265-159 Tuesday to expand the State Children's Health Insurance Program (S-CHIP)the state-federal program that provides coverage for 6.6 million children from families that live above the poverty level but have trouble affording private health insuranceby $35 billion over five years, said the Associated Press. The expansion would be paid for by federal tobacco tax increases.

President Bush wants a $5 billion increase for the program and argued that the congressional package was a step toward government-run [image-nocss] health care and would result in families dropping their private health insurance to sign up for the federal plan, said a News Tribune report. The current SCHIP program expires September 30, but Congress is expected to pass a temporary measure extending it if negotiations on a compromise with the White House are needed.

In the compromise bill, the proposed tax rates mirror the Senate version of the bill with three changes, according to the National Association of Tobacco Outlets (NATO): First, large cigars are now taxed at a slightly lower tax rate of 52.988% of the manufacturer's price (vs. 53.13%), but still have a cap of $3 per large cigar (defined as cigars weighing more than three pounds per thousand). Second, the tax rate on roll-your-own (RYO) tobacco has been lowered slightly to $8.8889 per pound (from $8.9286). Third, the floor stocks tax will apply to cigarettes and other tobacco products except large cigars. The floor stocks tax provision requires wholesalers and retailers to pay the difference between the current and higher tax rates on all of the tobacco products except large cigars that they have in inventory on Jan. 1, 2008. Each retailer and wholesaler will be allowed a $500 credit against any floor stocks tax owed. The floor stocks tax would be payable on or before April 1, 2008.

The vote fell 25 votes short of the 290 needed to override the promised presidential veto. (Click the Download Now button below to view NATO's roll call for the bill.)

And according to The Wall Street Journal, the showdown between congressional Democrats and the White House over children's health insurance is clouding the outlook of a proposed $36 billion tobacco tax increase. Lawmakers said the S-CHIP bill's defeat won't dampen Congress' willingness to raise the tobacco tax, but because it is now linked to S-CHIP, the tax increase might not emerge from Congress any time soon, the report said. If Congress sustains that veto for the duration of Bush's tenure, smokers would save $6 billion in 2008 alone, said the report, citing the Joint Committee on Taxation.

Tobacco companies could end up being golden, because this pairing takes them off the table for anything else, a Senate tax aide told the newspaper. But the fight will not end this week, House Speaker Nancy Pelosi (D.-Calif.) said.

The Senate this summer approved the $36 billion tobacco tax increase to pay for a $35 billion expansion of the S-CHIP. The House approved a smaller, $27 billion tobacco tax increase, but also included cuts in Medicare payments to insurers to offset the cost of a $50 billion S-CHIP plan. Democratic leaders have since agreed to stick with the Senate's $35 billion S-CHIP plan to avoid entangling the bill in a debate over Medicare.

If the S-CHIP bill is defeated, there is nothing to prevent lawmakers from resurrecting the tobacco tax increase as part of some other legislation, the Journal said. I would assume that tobacco tax will come back in one way or another, Senate Minority Leader Mitch McConnell (R-Ky.) told the paper.

But Senate Finance Committee member Blanche Lincoln (D-Ark.) and others said the tobacco tax increase has become so tied to the S-CHIP program that politically it couldn't be used for anything else. Lincoln predicted, however, that the bill won't be stranded. She said that Democrats' continued pressure on the White House will force Bush to bow eventually.

This legislation will haunt him, Pelosi agreed. We will see how long he can...sustain his veto.

A senior Senate tax aide also told the paper that there isn't any other issue on the Democratic agenda with which a tobacco tax could be pared. High-price items Congress will likely address this year include a fix to the alternative minimum tax and a Medicare payment fix for doctors.

Because it is a flat-rate tax, and because lower income citizens tend to smoke more, the cigarette tax consumes a substantially higher proportion of lower-income smoker's income than high-income smokers, said the report. So there is some political logic to tying a tobacco tax increase most affecting lower-income smokers to a program expanding health insurance for low- to middle-income children. There is no similar logic to raising tobacco taxes to raise payments for physicians or to protect families earning from $100,000 to $200,000 a year from the alternative minimum tax, the aide said.

Even Republicans opposed to the Democratic plan say a compromise between the $35 billion plan and the White House's $5 billion offer could be found and that a tobacco tax could pay for the increase, the report said. Rep. Jim McCrery (R-La.), the highest ranking Republican on the House Ways & Means Committee, said he has drafted such an alternative. While his alternative offsets the S-CHIP cost with cuts to other spending, McCrery said he could see a compromise that raised tobacco taxes though not to as high a level as under the original Democratic plan.

McCrery said part of the reason to vote to sustain the president's veto would be to pressure Democrats to consider such a compromise. I am hopeful that Democrats in the House will bring us into the room, he told the Journal.

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