Cigarette Tax Cost Trickledown

Hey, I love to eat. I will admit it. I have also been known to smoke a cigar from time to time. it's been a while, but I would be a hypocrite if this was a blog entry on the evils of cigarettes. It is not about that. I won't often be found buying a pack of smokes, but there is a good change you might find me with a pack of skittles rolled up under my sleeves and neither is very good for you. I want to say that, because I don't want to be acused of being irrationally judgemental about smoking, well, any more than I am about my own overeating. But I digress.

In this election there is plent of talk about the people sitting in the 95% of the population being cool with the highest boosting of taxes for the remaining 5% of the population. There is also quite a bit of speculation about how this will affect small businesses. I know a number of small buisness that are not going to bring in $250,000 of income in 2009 or likely soon after that. Most of those business are owned by an individual and don't employ other individuals on a fulltime basis. But what of the ones that do have multiple employees and increased costs of opperation due to having to manage that small business with a reasonable amount of community foot traffic? Well, they get hit and you also likely know a few folks who fit into this category. In New Jersey I frequent a few dinners that will fall into that category.

So what will happen if those taxes go up? We can look at the taxation on cigarettes as a historical example of that. Cigarettes are both state and federally taxed. They are taxed at the company level and at the consumer level. Why? Because we are addicted to the product and that yeilds a steady income for state and federal budgets. I am only partly kidding. There are a number of reasons, of which one factor is the stability of consumption on that market. Currently, automobile gas falls into this same category for many of the same reasons. There is a federal gas tax just like there is a federal cigarette tax.

So as cigarettes have increased in taxes those taxes are passed along to the consumer as an increased price. Take a look below at the price to tax ratio on cigarettes in high-income countries as outlined by the Disease Control Priorities Project.

This is 2:3 ratio meaning that for every $3 you spend on a pack of cigarettes, $2 tax dollars are added to the register-price for the consumer (for an average $5 pack.) In a sense, if you are smoker then the government is feeding and banking on the potential of your addiction. On the topic of oil, Obama is proposing a similar "windfall profits" measure on oil companies that make money based on our American addiction to oil in his words to address our "addiction to oil." The idea here is exactly the same. As profits go up for oil companies the Obama government would crank up taxes on those profits (this would obviously trickle down to consumers, just the same way the Fed taxes consumer cigarette purchases.) As a result he will give $1000 annual to couples and $500 to singles in a reverse-tax check to offset fuel prices. He is also proposing that the Federal government not undo the current gas tax on consumers. In this one example it will increase fuel costs, while attempting to keep us buying fuel by offsetting their cost through a reverse tax, while all along continuing to directly Federally tax you at the pump.

Now... imagine this economic cost trickledown rolling out through the entire economy for every significant business that employees people across the U.S? Companies will do what the Federal government is doing and increase the cost at the register, sharing that tax burden. From oil to a breakfast out with friends, increased taxes affect us on mainstreet. Like McCain said in the third Presidential debate, this is definitely not the time to be talking about raising taxes.

To simplify the idea here: The Federal government adds taxes to the at-the-register cost of cigarettes for the consumer. Business would likely follow-suite, doing the same thing the Federal government does to offset this huge increase in taxes (huge increased for both privately owned successful small busines as well as corporate taxes for large business that make everyday stuff like toiletpaper or socks or package milk.) Remember that "windfall profits" taxes and evil oil companies are the posterchild for the fight against corporate greed, but know that many regular consumer goods producing companies and company owners across America will see their personal and corporate taxes go up in Obamas plan as well.

McCain wants to repeal the gas tax. He wants to invest in pursuing and rewarding alternative fuel research rather than benefiting from our oil addiction. He doesn't want to grow the government and give out more money only at the expense of increased consumer costs for goods. This is one example of what McCain refers to as "risk" associated with Obama's plans.