WHO Proposes New Tax on American Smokers

Up in Smoke: Tobacco Taxes Bring Unintended Consequences

The World Health Organization’s (WHO) Framework Convention on Tobacco Control (FCTC) will meet in Moscow, Russia beginning on October 13th for a series of meetings to discuss how to reduce demand for tobacco (the United States, which provided $110 million in funding to the WHO in 2014, will not be in attendance). A report from earlier this year shows that WHO officials are encouraging countries around the world to raise excise taxes to account for at least 70 percent of tobacco products’ retail prices.

The FCTC report published in March claims that “[i]n most cases, higher taxes on tobacco products lead to higher prices which, in turn, lead to lower consumption and prevalence and result in ... the improved health of the population. The inverse relationship between price and tobacco use has been demonstrated by numerous studies and is not contested.” One economist who may wish to contest those statements – Arthur Laffer – happens to have (quite literally) written the book on the revenue effects of taxation and recently explored the issue of tobacco excise taxes, specifically, in a new work.

Laffer’s “Handbook of Tobacco Taxation: Theory and Practice” presents data from Ireland, Romania, Malaysia, and Singapore that show that even as cigarette excise taxes climbed between 2000-2009, smoking incidence in that time didn’t change at all – and in Malaysia, actually increased by 12 percent.

Despite relatively stable smoking incidence estimates between 2000 and 2009, duty paid volumes declined by 33 percent over the same period, while the number of counterfeit and contraband cigarettes consumed increased to 1.44 billion by 2009, accounting for 22.3 percent of total cigarette consumption that year[.] … Although the volume of counterfeit and contraband cigarettes decreased, it has continued to account for 19.1 percent of total consumption in 2012, illustrating the difficulties of eradicating illicit trade once it has become established in a market.

And studies conducted in the United States and France show that as cigarette taxes are increased, lower income individuals continue to smoke, accounting for a higher proportion of the total revenue in what is ultimately a regressive tax structure. Laffer modeled the WHO’s 70 percent excise incidence on a sample of countries and found it would, on average, increase the price of a pack of cigarettes by 107 percent – up from $5.66 to $11.71 per pack. The effect is especially pronounced in countries like Russia, India, and Peru, where the price would increase by $7.23, $7.46, and $9.34, respectively. The proposal is “far from best practice,” and would result in “draconian and arbitrary tax increases in almost every country … providing further incentives for illicit trade.”

If you tax something, you get less of it – or so the saying goes. For every rule there’s an exception, though, and in the case of tobacco taxes it has been well documented that such policies can be ineffective at best and downright harmful at worst.

Most Expensive Bill of the Week

The Bill: H.R. 5601, the Foreclosure Restitution Act of 2014

Cost Per Year: $1 billion ($5 billion over five years)

Last month, the Office of the Comptroller of the Currency reported some encouraging news out of the housing market: its most recent survey of U.S. mortgages suggests delinquency and foreclosure rates are lower than they were a year ago. However, while mortgage performance has been steadily improving, foreclosure remains a very real problem for many Americans. According to RealtyTrac’s August 2014 data, over one million properties in the United States were in some state of foreclosure (roughly 1 out of every 1,126 housing units), with Florida, Nevada, Maryland, New Jersey, and Georgia recording the highest rates in the nation.

Foreclosure rates remain elevated in the wake of the mortgage crisis the nation endured beginning in mid-2006. The Congressional Research Service (CRS) reports that over the three years from then through the end of 2009, foreclosure rates more than quadrupled. The ripple effects impacted borrowers across the credit spectrum, as more than 15.5 percent of subprime (i.e., those made to riskier borrowers) loans and three percent of prime (less risky) loans entered foreclosure.

Ever since then, large financial institutions have come under fire from politicians and regulators for the roles that they may have played in worsening the impact of the housing market collapse. In August, the Justice Department (DoJ) announced a $17 billion settlement with Bank of America (BoA) after determining that the bank mislead investors about the quality of mortgage-backed securities it sold to them (though some analysts contend that government regulations encouraged banks to make the risky loans in the first place). Of that amount, $5 billion was paid directly to DoJ, who will use it to provide “relief to struggling homeowners, including funds that will help defray tax liability as a result of mortgage modification, forbearance or forgiveness.”

The question now facing policymakers is which relief programs will receive the new funding. The government has a variety of initiatives designed to assist those going through or facing foreclosure, including the Home Affordable Refinance Program, Home Affordable Modification Program, the Hardest Hit Fund, and the National Foreclosure Mitigation Counseling Program. Congressman Alan Grayson (D-FL) has introduced legislation in the form of H.R. 5601 that would direct the $5 billion settlement funding to the Neighborhood Stabilization Program (NSP).

NSP was established in 2008 in order to “stabiliz[e] communities that have suffered from foreclosures and abandonment” by offering state and local governments grants to buy and redevelop abandoned homes. It was initially funded at $3.92 billion, and received an additional $2 billion through the American Recovery and Reinvestment Act – the President’s “stimulus” package – of 2009. In 2013, the NSP spent $793 million. The President has requested $15 billion in mandatory funding for a successor program known as "Project Rebuild," which would begin programming in 2015. A similar proposal was introduced in Congress as H.R. 1397, the Project Rebuild Act of 2013.

If enacted, the Foreclosure Restitution Act of 2014 would provide the $5 billion awarded to DoJ in the BoA settlement to be used for NSP initiatives. NTUF assumes that the funding would be spent over a period of several years, roughly $1 billion per year.

The Wildcard

The Bill: H.R. 5575, the Peaceful Learning Act of 2014

Cost Per Year: Unknown

Since the 1970s, government at the local, state, and national levels has regulated how loud railcars and locomotives can be. At up to 110 decibels, an engine’s horn can be as loud as emergency sirens and just a bit softer than a jet engine. The locomotives themselves also produce noise at sound levels comparable to loud diesel truck engines but at twice the distance. Many municipalities have designed rail lines to pass through heavily populated areas in ways to minimize disturbances to residents, for example, by laying rails in only industrial or rural areas or constructing sound barriers similar to those near highways.

Though these regulations have been in place for decades, problems still occur and can affect people in different ways. For example, the towns of Shoreview and Little Canada, Minnesota recently dealt with a train noise concerns. One local official said, “I don’t know of an issue that has had as profound impact on peoples’ quality of life … as the train noise.” A local solution was implemented. The towns were required “to improve their street-level railway crossings in order for them to meet federal railroad quiet zone standards,” which led to the state to issue bonds to finance the construction of crossing gates and medians.

Federal legislators have also proposed to better protect Americansfrom loud noises caused by passing and idle trains. One such bill, introduced by Congressman Joe Crowley (D-NY), attempts to address the issue for schools near tracks.

The Peaceful Learning Act calls for the Department of Transportation to conduct a study to determine how railway noise affects the health and conditions of students at schools close to rail lines and how effective current soundproofing in these schools is. Findings of the study would then be used to establish a single, reliable system for measuring railway noise to determine a minimum standard for such noise levels in urban areas. Included in the new standard would be creating local maps to show where noise levels are the most.

Rep. Crowley said that it “is unconscionable that so many children whose schools are located near elevated trains are forced to learn under these adverse conditions.”

Local districts would also be awarded grants to make their schools compliant with the new federal noise minimums. It is possible that the program would overlap or duplicate programs like the Federal Aviation Administration’s school sound insulation and noise compatibility programs, charged with reducing aircraft noise levels in buildings, including schools, near airports. In FY 2014, airport “noise compatibility” efforts received $133 million.

The text of H.R. 5575 would authorize “such sums as may be necessary to carry out this Act” and, until further information is made available, NTUF has not determined the budgetary impact of the bill. Funds are to be directed from the Mass Transit Account of the Highway Trust Fund, which would likely be unobligated tax dollars and be counted as new spending.

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