The Real Cost of Obama's Pre-K Plan

Published in CSP Daily News

NATO's Briant outlines drastic state costs, potential impact of another steep tobacco tax increase

By  Melissa Vonder Haar, Tobacco Editor

Tom Briant

CHICAGO -- Playfully introduced at CSP's Tobacco Category Review Meeting as a true "superhero of our industry," NATO's executive director Tom Briant has developed a stellar reputation for educating tobacco retailers on the state and local tobacco regulations threatening their business; however, this year, Briant's cautionary tale was not local, but national. The subject: President Barack Obama's pre-K expansion proposal.

Announced earlier this year, the initiative would expand preschool education to all low-income four year olds. The $75 billion project would be funded by a 93% increase to both the cigarette and other tobacco products (OTP) federal excise taxes. Cigarette and little cigar taxes would go up by 94 cents-per-pack, from $1.01 to $1.95; chewing tobacco would go up to 97 cents-per-pound; moist snuff to $2.91-per-pound; pipe tobacco would go from $2.83-per-pound to $5.64; and roll your own (RYO) would go up dramatically, from $24.78-per-pound to $47.82-per-pound.

"These are significant increases, almost doubling tax rates across the board," Briant said.

Industry observers need look no further than 2009 to glimpse how such significant increases could cause significant problems for tobacco retailers. When cigarette excise taxes were raised by 62-cents-per-pack, the Federal Trade Commission (FTC) reported that volumes fell by 13% through 2010.

"The President's plan of almost doubling the tax is going to have an even more significant impact on cigarette and OTP volume," said Briant. "It's just an estimate, but the increase would probably result in more than a 13% [volume] decline across the board."

While most retailers are aware that doubling excise taxes will have a definite effect on their business, there are plenty of aspects about Obama's pre-K initiative the public is not aware of.

'What's not widely reported is the fact that the states have to pay a significant percentage [of the pre-K funds]," Briant said. "It increases every year. In years one and two, a state needs to contribute 10% of the federal funds they receive for this program--by year 10, the states have to put in three times the amount the federal government is funding. And after year 10, it's all up to the states."

This means that if a state needs $100 million a year to cover the program, the federal government will cover roughly $90 million of the costs during the first two years, with the states contributing just $10 million a year; however, come the 10th year, the state will be on the hook for $75 million, with the federal government just covering $25 million.

"The unanswered question is where are the states going to find that money?" Briant said.

And while Secretary of Education Arne Duncan has been traveling to Republican-governed states like Georgia and Michigan to try and garner support for the program, NATO is doing its part to make sure such governors know the steep cost that would come along with the proposed pre-K expansion.

"We're issuing commentary letters to newspapers in the visited states pointing out the state funding requirement--and that states had better take notice because they're going to be on the hook for significant funding going forward," he said.

It's a fight that's far from over: Most Republican governors may like the concept of expanding pre-K education, but not if it means raising taxes to do so. Similarly, House Republicans are very cool on the idea of raising taxes again, especially after agreeing to an earlier tax increase (on the wealthy) earlier this year.

"This is going to be significant if it gets any traction," he continued. "That's the real question: will it get any traction?"