The late David Foster Wallace once said, “The great thing about irony is that it splits things apart, gets up above them so we can see the flaws and hypocrisies and duplicates.”
Sadly, we are seeing many hypocrisies on full display in the Build Back Better tax agenda that Congress is considering.
In the latest iteration of the Build Back Better reconciliation plan — the Democrats’ bill to fund a number of social programs — several tax changes are being considered to help offset spending. Two of these changes stick out: a tax cut for the wealthy and a tax hike on low-earners in the form of a nicotine tax.
The Democrats’ plan would lift the current cap on the state and local tax deduction from $10,000 to $72,500. Tax Foundation modeling has found that this regressive change would give taxpayers earning more than $500,000 an extra $11,233 in after-tax income.
This is a costly tax cut for high-earners, and to fit within the budgetary rules, Congress needs to offset some of these costs. One way being proposed to achieve this is by introducing federal taxes on nicotine products.
This new federal nicotine tax is a poorly designed tax that would hurt low- and middle-income consumers far more than anyone else.
The Build Back Better Act would tax products by nicotine content at a rate of $50.33 per 1,810 milligrams of nicotine. The reason for this specific rate is to tax nicotine at the same rate as cigarettes. But this means that many nicotine products, including those with a lower health risk, will be taxed at higher rates than more harmful, traditional tobacco products. Nicotine pouches, for instance, would be taxed at a rate 4.5 times the rate on cigarettes.
From a public health standpoint, this policy misses the mark. Using nicotine as a tax base is misguided, as nicotine content shares no association with the harm associated with consumption. In fact, smokers or dip users choose things such as nicotine pouches or vapes to wean themselves off more deadly alternatives. Taxing nicotine at the same rate as tobacco (or at a higher rate) harms public health by driving up prices on less harmful nicotine products, making it harder and more expensive for tobacco users to quit.
And when it comes to an economic analysis, this proposal is about as justifiable as throwing salt into the ocean. It’s not going to have a notable budgetary impact, and it goes against the Democrats’ pledge to not raise taxes on those making under $400,000.
The Joint Committee on Taxation, Congress’s nonpartisan scorekeepers, found that the proposal would raise just $8.7 billion over 10 years. Given the Food and Drug Administration’s recent regulatory action against vapor products, $8.7 billion may be a high estimate. When trying to find ways to raise trillions of dollars in revenue, this tax moves the ball less than a yard down the field.
But worse than that, it’s an extremely narrow and regressive source of revenue. Low-income people are more likely to use nicotine or tobacco products than high-income people. And many states already impose their own taxes on these products. For a smoker who switches to nicotine pouches to kick his addiction in a state such as Minnesota, under this new tax, a can of pouches would nearly cost $20.
Irony reveals hypocrisies. Funding tax cuts for the well-off through a nicotine tax on low-income workers — intended to benefit the most from the Build Back Better agenda — should have no place in this bill.
Ulrik Boesen is an excise tax policy expert at the Tax Foundation, a nonpartisan think tank in Washington, D.C.
