Opening act for Congress: raising taxes

Tom Curry National affairs writer • Profile • E-mail

WASHINGTON - While tax cuts are an integral part of President-elect Barack Obama’s stimulus plan, the newly convened Congress and the incoming commander in chief are nonetheless preparing for a tax hike.

House Majority Leader Steny Hoyer announced Wednesday that the House will vote next week on expanding the State Children’s Health Insurance Program, which will be funded by an increased excise tax on cigarettes and cigars.

A tax increase may seem counterintuitive in a recession — especially since Obama and congressional Democrats are simultaneously touting tax cuts as part of the cure for the ailing economy.

But its likely to be down played as a tax increase only on smokers, who, according to the Centers for Disease Control and Prevention, comprise roughly one-fifth of the population.

A spokesman for the House Ways and Means Committee said this bill mirrors the one passed by Congress in 2007, and subsequently vetoed by President George W. Bush.

A 156 percent tax increase
The legislation would impose a 156 percent tax increase on smokers, raising the 39-cents per pack federal cigarette tax to one dollar.

The Congressional Budget Office estimated that the bill passed in 2007 would have raised about $53 billion in revenue over ten years.

But it will be a relatively small tax increase compared to the tax cuts that Obama has proposed — those may end up amounting to more than $300 billion over two years.

The tax increase is also tiny compared to the projected $1.2 trillion deficit in the 2009 fiscal year.

But will Democrats also raise taxes on other demographic groups? They've yet to say if non-smokers will be targeted.

In an interview with CNBC’s John Harwood on Wednesday, Obama said that he had not made a decision yet as to whether he will ask Congress to raise taxes this year on people making more than $250,000. He's also pondering waiting until the end of 2010 when the current income tax rates expire.

Declining budget deficit in 2012
The CBO budget outlook released Wednesday assumes that the federal deficit will fall to a quite modest 1.6 percent of GDP in 2012, down from the staggering 8.3 percent in 2009.

Video   Obama’s fight over economic plans Jan. 5: President-elect Barack Obama wants to include $300 billion worth of tax cuts in his stimulus package with the hopes of enticing Republican support. A Hardball panel discusses. Hardball

But that CBO forecast assumes that Congress will let the income tax rates revert to their higher pre-Bush levels of 2000.

If Congress does nothing before the end of next year, income tax rates will go up and most Americans will face tax increases — and for some, they'll be significant.

Next year is an election year for a third of the Senate and all House members, so Congress could potentially be voting on a large tax increase right before, or perhaps just after, the 2010 election.

“That issue is going to have to be addressed sometime over the next year,” said House Minority Leader John Boehner on Thursday. “The first thing we have to do is get through this next month in determining what this economic rescue package is going to look like, how big it is, and what’s its made up of. The president has his budget submission in early February — and so we’ll have plenty of time to deal with that (2010 tax) question.”

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