December 8, 2013
Many West Virginians are naturally wary of major government spending programs. For that reason, you cannot begrudge them if they express concern when they learn President Obama has been advocating for another expansion of federal and state government. Included in the White House’s budget proposal this year is a costly state-federal spending program that would expand access to early education. Make no mistake, the program itself is not the problem—the funding mechanism and its increasing reliance on state dollars is the problem.
The federal government has committed $75 billion to this effort, while the states participating in the program would cover the growing, long-term costs of the program. The federal government’s funding obligation would be 90 percent of the total program cost in year one and decrease to 25 percent by year ten. At that point the states would be compelled to cover three-fourths of the program cost-a significant commitment. The federally funded portion of the program would not be financed by spending cuts, but by a tax increase—a $.94 per pack increase in the federal excise tax on cigarettes.
This is problematic for multiple reasons. Tobacco tax increases hurt the retail sector and unfairly target a small portion of the population to finance programs designed to benefit the masses. We’ve seen how difficult it can be for the government to implement new government spending programs and we have also seen how these programs can have unforeseen effects on the economy, employers, employees, and consumers.
Often times our leaders in Washington are so focused on the end goal that they fail to consider the unintended consequences their decisions may have. Increasing the federal cigarette excise tax could have negative consequences on the economy, particularly in the retail industry. Retailers nationwide are heavily dependent on revenue from the sale of tobacco products to adult consumers and increasing the cigarette tax could cause a spike in black market sales where cheaper, oftentimes untaxed cigarettes are sold. Unable to compete with these illegal products, law-abiding retailers could be put at a distinct disadvantage. Revenue that tobacco retailers rely on to make payroll and pay their bills could be diverted elsewhere.
Black market cigarette sales are an issue not only for retailers, but also for government. When counterfeit or black market cigarettes are sold, the government misses out on the tax revenue it would have collected had the cigarettes been sold by a legal retailer. For this reason, tobacco tax increases at all levels of government—local, state, and federal—have often missed their revenue targets. It is very possible that the federal government could collect less revenue from this tax increase than it had predicted. Participating states could then be forced into the difficult position of having to come up with the additional money to fill the funding gap—either by raising taxes or cutting spending elsewhere.
Expanding early education is a good idea and it is necessary to maintaining a talented workforce and the nation’s global competitiveness. However, funding something as important as education with a regressive, unreliable source of revenue is poor policy. President Obama and Congress should look for another way to fund this program, one that does not hurt small businesses and eventually leaves states on the hook to pay for.
Owner, Smoker Friendly