Genevieve Kenney, a principle research associate at the Urban Institute, is a coauthor of this post. She is a nationally renowned expert on the State Children’s Health Insurance Program, Medicaid, and the broader coverage and access issues facing low-income children and their families.
It is now becoming a tradition that major legislation to expand health access to children be financed by tobacco tax increases. The original state children’s health insurance program (SCHIP) was financed by an increase in the federal excise tax on cigarettes. Increases in state tobacco taxes have also funded recent expansions in state programs. Legislation passed by the House to renew and expand SCHIP would increase the federal tax to 84 cents per pack on cigarettes, with commensurate increases in taxes on other tobacco products, raising $54 billion of tax revenues over the ten-year budget period. The Senate version would increase the tax to $1.00 per pack, raising $71 billion. The ultimate tax rate will be determined in a House-Senate conference, but a tobacco tax increase will surely be in the bill.
President Bush has promised to veto the legislation primarily because it “clearly favors government-run health care over private health insurance,” but he also objects to the financing method, which he calls “a massive, regressive tax increase.” The president’s interest in promoting tax fairness is welcome, even if late-coming. As recently as January, he proposed the permanent extension of much more massive and regressive tax cuts that are set to expire at the end of 2010, which would reduce federal tax revenues by almost $1.9 trillion over the next ten years and whose benefits disproportionately accrue to those with high incomes.
Tobacco Taxes Are Regressive, But Families Gaining New SCHIP Coverage
Would Be Big Net Winners, Even If Family Members Smoked
Cigarette excise taxes are regressive. Lower-income people are more likely to smoke than those with higher incomes and the tax is a larger percentage of income for someone making lower income than for someone earning more. For example, a pack-a-day smoker would pay $164 in additional taxes over the course of a year under the House proposal or $223 under the Senate plan. That amounts to about 1 percent of income for a family earning $20,000, compared with 0.2 percent or less for a family earning $100,000, assuming no change in smoking behavior.
Of course, the insurance financed by the cigarette tax increases also disproportionately benefits lower-income households since it is targeted at children with incomes below 200 percent of the Federal Poverty Level (FPL). Current estimates (calculated from the Congressional Budget Office’s March 2007 baseline) indicate that the average annual cost per child of SCHIP coverage is approximately $1,700. Thus, low-income families with children who obtain coverage under SCHIP would gain much more than they lose, even if one or more family members smoke.
Higher Tobacco Taxes Reduce Smoking
The tax also improves children’s health by deterring youth smoking. Research suggests that excise taxes have a significant effect on the likelihood that young people will take up smoking. By some estimates, teens’ elasticity of demand for cigarettes is greater than 1.0, meaning that a 10 percent increase in the price of cigarettes would reduce youth smoking by more than 10 percent. Some more recent research suggests less price sensitivity.
Older smokers appear to be less affected by tobacco taxes than teens, but evidence suggests the taxes can reduce both the amount of cigarettes smoked and the likelihood of smoking. In addition, by reducing parental smoking and children’s exposure to second hand smoke, higher tobacco taxes are expected to improve children’s health status by reducing their rates of asthma and their rates of respiratory symptoms such as wheezing and coughing.
Other arguments used to justify cigarette excise tax increases are less compelling. For example, some argue that a tax is justified because smokers impose costs on others because of their higher health costs. In Smoke Filled Rooms: A Post-Mortem on the Tobacco Deal, W. Kip Viscusi examined all of the measurable costs of smoking and concluded that, on balance, smoking saves the rest of us money. Smokers’ premature deaths reduce payouts from Social Security and pensions and reduce Medicaid costs to pay for long-term care, more than offsetting the costs of higher health spending (both public and private), higher group life insurance premiums, smoking-related fires, and sick leave. Viscusi concluded that existing excise taxes already more than compensated for any other costs, such as those attributable to second-hand smoke.
Finally, changes in the federal excise tax affect the states. Higher federal taxes will lead to declining state tobacco tax revenues as taxable tobacco purchases fall (due to both less use and more tax evasion). Higher federal excise taxes may also limit the ability of states to impose higher excise taxes on tobacco. However, the expansion in funds for SCHIP helps states (especially given the matching structure, where on average, the federal government pays 70 percent of the costs under the program), many of which use funds from recent state tobacco tax increases to fund their own SCHIP expansions. If tobacco taxes are going to be used to expand SCHIP programs, federal tax increases are a more effective revenue generator, since federal taxes are much harder to evade than state taxes.
The President’s Cancer Panel Calls For A Tobacco Tax Increase
A just-released report by the President’ Cancer Panel calls for a tobacco excise tax increase as a way to deter youth smoking and finance smoking cessation programs. The report also suggests that a federal tax increase could help states by lowering their medical costs: “An increase in the Federal tax would augment the effect of state excise tax increases, which have been shown to reduce smoking initiation and prevalence markedly (particularly among youth) and thereby would help to reduce states’ burden of payment for treatment of diseases caused by tobacco among their populations.” (p. 76) The report notes that a 2004 National Action Plan for Smoking Cessation had called for a $2.00 per pack increase in the federal cigarette tax.
While the president is correct that tobacco excise taxes are regressive, the package as a whole benefits low-income families with children and is, on balance, progressive. The cigarette tax also deters youth smoking and reduces children’s exposure to second-hand smoke, logical complements to a program focused on children’s health. Fairness is a legitimate concern, which might more effectively be addressed by making the income tax more progressive (or at least not extending the recent tax cuts beyond their scheduled expiration in 2010).