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Garbled Sin Tax


Even our vices aren't safe from recession.

Now may be the time to quit smoking. And drinking. Gambling, too.

As a way to shore up their decimated budgets, many state governments are playing vice cop, hiking "sin taxes" on the traditional American pastimes listed above. Sin taxes are nothing new -- consider Prohibition as the ultimate example -- but there's another round of them on the way.

A unique dynamic is at play: People turn to their vices for comfort during dire economic times - and yet, in such times, states balance their budgets on the backs of smokers and drinkers (which is a considerable portion of this country).

And states are not the only ones getting in on the act. In fact, the tobacco industry finds itself in the crosshairs of the new White House - a direct reversal of the Bush administration's policy, which opposed, vetoed or refused to act upon many key issues.

The federal government is proposing a significant increase in federal excise taxes on cigarettes of $0.61 to $1 a pack, and even sharper increases on other tobacco products, to fund the State Children's Health Insurance Program. Congress is expected to approve this measure soon. Furthermore, separate legislation, which would hand the Food and Drug Administration broad authority over cigarettes for the first time, is expected to be passed.

This is a perfect storm for major tobacco companies like Altria Group (MO), Lorillard (LO), and Reynolds American (RAI). In response to higher prices, demand for tobacco products should fall, and, in turn, tobacco companies will likely raise prices to compensate for that decreased demand, which should curb demand even more.

Matthew L. Myers, the head of a nonprofit anti-smoking group, Campaign for Tobacco-Free Kids, said the election of Barack Obama "changes everything" for the tobacco industry.

"I think that 2009 has the potential to be the most historic year in making progress on tobacco at the federal level since the first surgeon general's report in 1964," Myers told the New York Times.

Even in the South, perennial stronghold of the tobacco industry, such states as Arkansas, Mississippi and North Carolina are considering sin taxes on tobacco and alcohol. It's a testament to the severity of this recession, because tobacco lobbyists in those states comprise one of the most powerful and well-funded interest groups.

States have couched their arguments for sin taxes by invoking the social and health benefits of reduced smoking or drinking. The taxes, their proponents say, are designed to at once raise revenue for social services and to influence society's behavior in positive ways. In Arkansas, for example, the governor announced his intentions at a children's hospital, and said the revenues would go toward expanded health programs.

If it's any consolation, the tobacco industry should have company soon enough - from soda companies. Even drinking the fizzy stuff is a sin today. Governor David Paterson of New York recently offered a tax on sugared beverages like soda, in order to raise an estimated $404 million. It's being called an obesity tax. Rest assured, Diet Coke addicts: It only applies to full-calorie drinks.
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