Smoke Up to Save the Children

Earlier this year, Congress passed H.R. 2 - the Children's Health Insurance Program Reauthorization Act of 2009 or CHIPRA (an expansion of S-CHIP). It was signed into law by Obama on February 4 after sailing through both the House (on January 14) and the Senate (on the 29th). According to the Congressional Budget Office (CBO) report on January 13 which analyzed the bill as it was submitted by the House Committee on Energy and Commerce, the legislation will add an average of $6.4B per year (yes, only ten digits!) to the federal budget. This will be offset by excise tax increases on tobacco products.

The U.S. tax code contains excise taxes on a variety of tobacco products. The details (pre-H.R. 2) can be found here - Title 26, Subtitle E, Chapter 52, Subchapter A, § 5701. Most of the debate and discussion on the new taxes has been centered upon the increase of taxes on cigarettes. This is obviously because cigarettes are the most popular tobacco product. The new tax rates went into effect on April 1. The common cigarette - Class A cigarettes which weigh not more than three pounds per thousand - was previously taxed at a rate of $19.50 per thousand. This equates to 39 cents per pack. The new tax rate is $50.33 per thousand or 100.66 cents per pack. This is a hefty 158% tax hike.

(Yes. There are Class B cigarettes... in theory. Read here if you are interested.)

Now, who smokes? Well, according to Gallup, more than half of the smokers in the U.S. earn less than $36k per year. That makes this a decidedly unprogressive tax. I'm not exactly a huge fan of progressive taxation, but this is a bit odd nowadays. Not surprisingly, there is some opposition to these tax increases. The Tax Foundation, a "nonpartisan tax research group", has authored an opinion which can be found here. Additionally, Altria (formerly known as Phillip-Morris) and R.J. Reynolds have websites, TobaccoIssues.com and NoCigTax.com respectively, which provide their opposing viewpoints (here and here).

The most interesting feature of the tax increase is that which is applied to "roll-your-own" tobacco. Many cigarette smokers have turned to RYO or MYO by purchasing their own tobacco and papers (or tubes). This tobacco (and the papers, and the tubes) is also taxed. Prior to April 1, roll-your-own tobacco was taxed at $1.0969 per pound. The retail cost would typically be between $20-$30 per pound. This would get you about 300 cigarettes. Rolling papers would cost about another $5 for this many cigarettes (taxes about 6 cents). All-in, this would cost you about $2 per pack for RYO with taxes at about 7 or 8 cents. (Note: this is only federal excise taxes.)

The new legislation increases the roll-your-own tobacco tax to $24.78 per pound. That is not a typo. That is a 2159% increase. Rolling papers go from 1.22 cents per 50 to 3.15 cents per 50. The same pack of 20 RYO cigarettes will now probably cost about $4. This is a ridiculous and egregious tax increase.

Here's where it gets a little interesting. In the last two years of the Bush administration, the Democrat-controlled Congress passed similar versions of this legislation twice: H.R. 976 and H.R. 3963. Both times Bush vetoed the legislation and both times Congress failed to get a 2/3 override. Both versions also called for roll-your-own tobacco to be taxed at $8.88889 per pound. By the time the legislation was taken up again, the tax rate on RYO had exploded! I have not been able to find any information which may indicate who was responsible for this massive increase.

There were a few Senators who noticed the massive increase. Sen. Jim Webb (D-VA) submitted and withdrew an amendment which would have reduced the RYO tax to $18.73 per pound. However, his amendment reduced taxes across the board and didn't focus on RYO. Sen. Jim Bunning (R-KY) submitted an amendment to explicitly reduce the RYO tax from $24.78 to $2.8311. This is incidentally the new tax rate on pipe tobacco. There were 60 amendments submitted in the Senate - these were the only two I could find (yes, I scanned all of them) which specifically addressed changes in the tax rates.

The folks over at RYOrevolution.com have a lot of information on their website including this nifty table showing the tax increases on various tobacco products. They also provide a list of tobacco wholesalers/retailers. In reviewing their site and the links to the various tobacco providers, two things became clear. First, most of the links are either dead or do not provide any pricing information. Second, it appears that Daughters & Ryan (D & R Tobacco) is perhaps the market leader. D & R has discontinued the sale of RYO and will now focus on pipe tobacco. Pipe tobacco is taxed at a lower rate ($2.8311 per pound) and can be pretty much the same thing as cigarette tobacco. It appears that D & R has modified the cut of the tobacco and packaged their RYO blends as pipe tobacco. This helps keep the cost down and is compliant with the tax code. The interested reader can refer to the tax code linked above for the definitions of roll-your-own versus pipe tobacco.

I think the key takeaway is that smoking, like paying taxes, is patriotic because it will provide the revenues necessary to provide health care for children. Of course, the new taxes may also be designed to reduce smoking... Now I'm confused.