Obama proposes 94-cent tax hike on cigarettes

WASHINGTON (AP) -- President Barack Obama's budget plan would increase taxes by $1 trillion over the next decade, including a new tax on cigarettes and familiar proposals to increases taxes on the wealthy and some corporations.

The president said his plan includes $580 billion in tax increases to help reduce government borrowing. But the tax hikes don't stop there. Obama's budget proposal would also impose an additional $400 billion in tax increases. Much of it would be used to pay for more spending.

Obama's proposal would increase the federal tax on cigarettes from $1.01 a pack to $1.95. The new cigarette tax would raise an estimated $78 billion over the next decade to pay for pre-school programs for children.

Obama says his tax plan is part of a balanced approach to deficit reduction that includes painful cuts to benefit programs like Social Security and Medicare. Most GOP lawmakers adamantly oppose new taxes, which means his plan has little chance of passing Congress.

Obama already got Congress to increase taxes by $600 billion in January. His budget would add to those tax hikes.

"To be clear, the package I am offering includes some difficult cuts that I do not particularly like," Obama says in his budget message. "But these measures will only become law if congressional Republicans agree to meet me in the middle by eliminating special tax breaks and loopholes so millionaires and billionaires do their fair share to cut the deficit."

In his budget, Obama calls for an overhaul of the nation's tax laws that would cut tax rates and simplify the system while generating additional revenue to help reduce government borrowing. The plan, however, provides few details on how the rate cuts would be financed.

There is a growing movement in Congress to do tax reform but there is much disagreement over whether it should result in higher overall tax receipts. Many Democrats, including Obama, want to use tax reform to raise taxes. Most Republicans oppose higher taxes.

Obama's budget would create a fund of about $100 billion that would be used to finance lower corporate tax rates. The fund, however, is more symbolic than substantive because $100 billion would only cover the cost of lowering the corporate income tax rate from 35 percent to 34 percent.

Obama has said his goal is a corporate income tax rate of 28 percent.

Obama's proposed tax increase on cigarettes is popular among health care advocates who believe it provides the additional benefit of encouraging smokers to cut back or quit. In addition to the direct revenue from the tax, the Congressional Budget Office analysis concluded that health improvements related to less smoking would save the government about $1 billion over 10 years and generate additional revenue of $3 billion because of a boost in earnings from healthier workers.

The tobacco industry promptly criticized the proposal.

"The idea of increasing taxes on low- to middle-income Americans at this time is ludicrous," said Bryan Hatchell, a spokesman for Reynolds American Inc., the nation's second-biggest tobacco company. "As middle-income Americans struggle to make ends meet in a very slow economic recovery period, this is not the time to hit them with higher taxes."

The biggest tax increase in Obama's budget would limit the value of itemized deductions for wealthy families. The limits would apply to all itemized deductions, including those for mortgage interest, charitable contributions and state and local taxes. They would also apply to tax-exempt interest, employer-sponsored health insurance and income exclusions for employee retirement contributions.

The proposal would raise $529 billion over the next decade.

Charitable groups have already mounted a lobbying campaign to oppose the limits because they are worried they would discourage wealthy people from donating. Obama has made similar proposals in previous budgets and received lukewarm responses from fellow Democrats. Most Republicans oppose it.

Among the other tax changes, Obama's budget would:

— Impose the "Buffett Rule," named after billionaire investor Warren Buffett, an Obama supporter who favors higher taxes. The rules say people making more than $1 million must pay at least 30 percent of their income in federal taxes. The rule would raise $53 billion over the next decade.

— Prohibit tax-free contributions to retirement accounts once the account's assets reach a certain limit. The initial limit would be set at $3.4 million. The proposal would raise about $9 billion over the next decade.

— Eliminate a series of tax breaks for oil, gas and coal companies, raising $44 billion over the next decade.

— Change accounting rules for the way companies value their inventories for tax purposes. The change would raise $81 billion over the next decade.

— Expand and make permanent the research and development tax credit, saving businesses $99 billion over the next decade. The current credit expires at the end of the year, though it is routinely extended.

— Make permanent rules that allow small businesses to more quickly write off expenses, saving business $69 billion over the next decade.

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Associated Press reporters Jim Kuhnhenn in Washington and Michael Felberbaum in Richmond, Va., contributed to this report.

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