Lost in loophole

A lot of people who roll their own cigarettes were outraged last year when the federal government boosted the tax on a pound of loose tobacco from $1.10 to $24.78.

Taxes were raised on all forms of tobacco to pay for an expansion of the State Children’s Health Insurance Program (SCHIP), but the tax hike on roll-your-own tobacco was especially exorbitant. Yet the anger seemed to subside fairly quickly. Perhaps that’s because a lot of tobacco companies began marketing what was once labeled “loose tobacco” as “pipe tobacco,” which is only subject to a $2.83-per-pound federal tax.

Over the past year, production of loose tobacco has dropped precipitously, while pipe-tobacco production has soared. In March 2009, just before the tobacco-tax increase took effect, U.S. companies produced about 270,000 pounds of pipe tobacco. This past March, they produced 2 million pounds.

Either pipe smoking suddenly mushroomed in the United States – or a whole lot of people switched from loose tobacco to “pipe tobacco” to roll their own cigarettes.

Call it a legal loophole, smart marketing or smokers’ revenge, the change has cost the U.S. Treasury about $250 million in lost tax revenue thus far, according to public health officials.

An analyst with the Oregon Department of Health first identified the loophole late last year, and the Associated Press publicized the millions being lost.

The Obama administration vowed to formulate new rules differentiating between roll-your-own tobacco and pipe tobacco, and legislation was introduced in Congress to close the loophole, yet it remains wide open.

The revenue from the tobacco-tax increase is targeted to help fund SCHIP, which provides low-cost health insurance for children in low-income, working-class families. The program includes MIChild in Michigan, which covers approximately 30,000 children.

One likely reason lawmakers have been slow to close the loophole is because the original tax increase for loose tobacco from $1.10 to $24.78 per pound was nothing short of outrageous. It seemed inevitable that smokers and tobacco companies would find a way around it.

And thus they have. But at a price that could short-change SCHIP, and leave all taxpayers on the hook for making up the difference.

The entire situation exemplifies why Americans have grown weary and cynical about our tax structure. Too often it’s delusional. Lawmakers come up with a tax to fund a new program, based on overly optimistic calculations. Then someone finds a loophole through which to avoid paying the tax. The new tax doesn’t generate as much revenue as predicted, but the program still needs to be funded. Either additional tax revenue has to be generated or the government goes further into debt.

With $250 million lost over the past year because of the tobacco-tax loophole, the only responsible choices seem to be to either close the loophole or reduce funding for SCHIP. At this point, however, politicians seem loathe to do either. Yet to continue to increase the federal debt is just pushing a growing problem further down the road.

Eventually, we’re all going to have to pay. We must start dealing honestly with government spending with numbers that truly add up.

source: battlecreekenquirer.com

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