	Introduction

This report discusses proposals to raise the cigarette tax to help pay for reauthorization of the State Children's Health Insurance Program. H.R. 2 passed the House on January 14, 2009 and it included the same cigarette tax as proposed in the 110 th Congress, an increase of 61 cents per pack, raising the tax from 39 cents to $1. The Senate version and the final legislation, P.L. 111-3 includes taxes similar to H.R. Federal cigarette taxes are $0.39 per pack, accounting for 94% of federal tobacco tax revenue. There is a 4 cent tax on a package of small cigars. Large cigars are the only tobacco product with a tax based on price, but they also have a cap; the price-based tax rises in proportionally, but the cap increases by much more, from 5 cents per cigar to $0.40 in the House bill ($0.4026 in the Senate Finance bill and the final legislation). Tobacco tax receipts in the United States in FY2007 included $7.5 billion in federal tax, $16.2 billion in state and local taxes, and $8 billion in payments from the Master Tobacco Settlement. CRS estimates suggest there will be a loss of revenue to the states approaching $1.5 billion. Are tobacco taxes the most desirable source of revenue? In addition, smoking is more prevalent among lower income individuals. To illustrate, in 1998 the Joint Committee on Taxation estimated that a 76 cent tax increase (brought about through a proposed federal tobacco settlement) would raise the effective tax rate on average by 0.3% of income, but would increase the burden of those with incomes below $10,000 by 2% of income and the burden of those in the $10,000-$20,000 income by 0.6% of income. The ceiling was lowered to $3 on the Senate floor in the 2007 legislation and the ceiling in the House bill was $1 in 2007. H.R.
On January 15, the House passed H.R. 2, a bill which included increased tobacco taxes to finance State Children's Health Insurance Program (SCHIP). This legislation was similar to that passed in the 110th Congress (H.R. 976 and H.R. 3162) although the initial House proposal had smaller tax increases.. H.R. 2 increases cigarette taxes, the primary source of tobacco tax revenues from 39 cents to $1.00. According to the Joint Committee on Taxation, the cigarette tax will raise $6.4 billion in federal revenues in FY2010 with all federal tobacco taxes increases raising $7.1 billion. A similar tax increase was contained in the Senate bill, and in the final proposal, P.L. 111-3 (although in both case the tax was increased by an additional two thirds of a cent, to $1.0066.) The analysis suggests that state and local governments will lose about $1 billion in cigarette tax revenues and up to $0.5 billion in lost revenues from the tobacco settlement payments. The legislation is now being considered in the Senate.
A justification is to discourage teenage smoking, but this effect is probably small; a reservation is that the burden falls heavily on low-income individuals. Taxes on other tobacco products are also increased, although cigarette taxes account for most tobacco revenues.
In the 110th Congress, the President vetoed the 110th Congress SCHIP proposal on October 3, 2008, the House failed to override the veto and a new bill, H.R. 3963 passed the House and Senate, with no changes in the cigarette tax, but changes in spending rules, and the President vetoed that version on December 12, 2008.