Tax Analysts Blog

When a Tax Hike Is, in Fact, a Tax Hike

Posted on Jun 29, 2009

Over the weekend, President Obama opened the door to a new tax on employer-provided health benefits. Speaking on ABC's "This Week," his chief political adviser, David Axelrod, acknowledged that such a tax would violate Obama's promise to avoid new levies on anyone earning less than $250,000 a year. But Axelrod stood firm, refusing to reaffirm Obama's categorical pledge. "One of the problems we've had in this town is that people draw lines in the sand and they stop talking to each other," he said.

Taxing health benefits is a good idea -- and maybe even good politics. It enjoys broad support among policy wonks in both parties (if not among liberal activists). And given the difficulty of financing healthcare reform, it's too lucrative to ignore.

But a benefits tax would not be Obama's first compromise with his "no new taxes" pledge. In February, the president signed a children's health bill that included a substantial hike in the federal cigarette tax. Critics pounced on the provision, insisting that Obama had broken his promise to avoid tax hikes on less-than-rich Americans. "Obama's cigarette tax puts the lie to his no new taxes pledge," declared Peter Roff, a conservative blogger for U.S. News and World Report.

And that's a fair point. On the campaign trail, Obama phrased his tax promise in sweeping terms. "I can make a firm pledge," he declared in September 2008. "Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes."

Obama defenders have insisted that this pledge -- when evaluated in context -- was obviously meant to apply only to income and payroll taxes. After all, candidate Obama was already on record supporting higher cigarette taxes. And when discussing his "no new taxes" pledge, the candidate confined his examples to income and payroll levies.

Some people find this argument convincing. PolitiFact, a nonpartisan project sponsored by the St. Petersburg Times, largely accepted it when evaluating Obama's tax pledge in April 2009. But to my mind, it's ridiculous. At some point, even political speech has to mean what it says. Obama promised that no one earning less then $250k would see "any form of tax increase." That seems pretty categorical to me. So does "not any of your taxes." Duck and dodge as much as you want, but "any of your taxes" means, well, any of your taxes.

If this were just an example of political weasel-talk, then it wouldn't amount to much. But the flip-flop on cigarette taxes reveals something important about tax politics in Washington. Politicians seem to think that the distributional impact of sin taxes is irrelevant. Most profess to believe that new taxes on poor people are bad. But when poor people smoke, drink, drive cars, or engage in other disreputable behavior, then regressive taxes aren't so bad. At least not to politicians. In fact, they're good, because they presumably diminish the popularity of these anti-social or self-destructive activities.

Don't get me wrong: I'm not against cigarette taxes, or regressive taxes in general -- if the money is well spent. After all, regressive taxes can produce policy outcomes that are progressive in their overall impact. That's why many liberals are warming to the notion of a value-added tax.

But it's vital to be candid about the trade-off. Weasel arguments trying to square categorical pledges with political realities are dangerous. They encourage (more) voter cynicism and obstruct useful policy development. Better to simply acknowledge the reality. Which, after all, is not such an unpleasant one, at least for Democrats.

Which is why Axelrod's admission is welcome. It was also probably unavoidable -- trying to reconcile the health benefits tax with Obama's over-broad campaign promise was never going to fly. But it's still a step in the direction of political truth telling. Which is a refreshing change.

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