Billions in Tobacco Taxes to Fuel Expansion of Federal Health Program

Published October 1, 2007

The big question over reauthorization of the federal government’s State Children’s Health Insurance Program (SCHIP) appears to be this: $35 billion, $50 billion, or something in between?

On August 1, the U.S. House of Representatives passed a bill that would expand the program by $50 billion over five years. The Senate followed a short time later with approval of a $35 billion increase. A conference committee is expected to reach a final figure before the program expires September 30.

Funding would come from a 61 cents increase in the 39 cents per pack federal cigarette tax, putting the federal tax at $1 a pack. Federal taxes on other tobacco products also would climb. (See sidebar.)

President George W. Bush has vowed to veto the legislation.

Middle-Income Families Subsidized

The legislation would provide health insurance subsidies to families earning up to four times the poverty level–$83,000 a year for a family of four. The bill also makes major changes to the Medicare Advantage program, physician payment schedules, the Medicare prescription drug benefit, and Medicaid.

Even though the program’s intent is to provide health insurance coverage to children, adults would be allowed to enroll as well. Some states already have more adults than children enrolled in SCHIP.

SCHIP was created in 1997 to provide financial assistance to families who need help paying for children’s health insurance but earn too much money to qualify for Medicaid. Since then the federal government has spent nearly $40 billion on the program, according to the Congressional Budget Office (CBO). About 6.6 million children and 670,000 adults are currently enrolled.

‘A Welfare Program’

“Let’s be clear. SCHIP is a welfare program,” said Michael Tanner, director of health and welfare studies at the Cato Institute. “How far up the middle class do we want welfare to go?”

The CBO estimates 50 percent of new SCHIP funds would go to children in families who would otherwise have private insurance coverage, and some economists say that estimate is low. Tanner said this would crowd out private insurance and shift costs onto taxpayers.

Support Is Wide

Though most Republican lawmakers oppose the legislation, SCHIP expansion does have a wide range of support, from liberal Sen. Ted Kennedy (D-MA) to conservative Sen. Orrin Hatch (R-UT). Kennedy and Hatch were the original SCHIP sponsors in 1997.

Critics say the expansion is a backdoor move to establish a national health system. They also say the tax scheme is especially harmful to lower- and middle-income families, who tend to use tobacco products more than higher-income families.

And, ironically, government budget forecasters say states could see billions of dollars less in tobacco revenue as a result of the federal tax hike.

The CBO and U.S. Treasury Department have estimated a revenue loss to the states of $1.07 billion to $1.2 billion a year, as the higher price for cigarettes cuts consumption and prompts smokers to choose low-cost off-brands or turn to black markets.

Revenue Losses

The predicted cut in tobacco consumption would result in lower payments to states by the major tobacco companies under the 1998 Master Settlement Agreement, which ended state lawsuits against the tobacco companies. It also would cause state cigarette excise tax revenues to fall.

Supporters say the tax hike would have benefits.

“The public health benefits resulting from higher tobacco costs are well documented,” said the American Academy of Family Physicians in a June letter to members of Congress. The letter added, “By discouraging smoking through an increase in the tobacco tax and using the resulting revenues to improve enrollment in children’s health insurance programs, we are creating a win-win proposition in support of our children’s health.”

Ohio Gov. Ted Strickland (D) acknowledged states probably would lose tobacco revenue as the CBO and Treasury Department predict, but said he nonetheless supports SCHIP expansion and higher tobacco taxes.

“We certainly wouldn’t want lack of revenue from cigarette taxes to keep us from providing health care for our kids,” Strickland said during an August 8 appearance at Columbus Children’s Hospital to urge support for the SCHIP legislation.

Heavily Regressive Tax

A study released in July by the National Center for Policy Analysis said the SCHIP tax hikes would be heavily regressive because rates of tobacco use are highest among lower- and middle-income citizens.

“[P]olicymakers should also be concerned with the economic well-being of their lower-income constituents. One must question the fairness of hiking taxes that are known to disproportionately burden poor families,” the NCPA report states.

Other economists also question the fairness of taxing a narrow segment of the population–tobacco users–to fund a broadly available program such as SCHIP.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News and a research fellow at The Heartland Institute.

For more information …

“Taxing the Poor,” National Center for Policy Analysis, July 2007:

“Budget Options,” Congressional Budget Office, February 2007: