The House and Senate recently passed bills to reauthorize the State Children's Health Insurance Program (SCHIP) that will soon be reconciled in conference. Both bills rely on increasing the federal tobacco tax-by 45 cents in the House bill and 61 cents in the Senate bill-to fund SCHIP expansions. An increase in the federal tobacco tax would cause states to lose tobacco tax revenue and would also result in the majority of states losing out under the redistribution of SCHIP expansion funds. Furthermore, the tax hike would not provide enough revenue to fund proposed SCHIP expansions; making up the difference would require millions of new smokers. As the legislation moves to conference under the threat of veto by the President, Members of Congress should consider the negative consequences that SCHIP expansion would have on their states.
States Would Lose Revenues
When consumers purchase a pack of cigarettes, they pay both a state and a federal tax. An increase in the federal tobacco tax would cause the price of a pack of cigarettes to increase. Due to sensitivity to increases in the prices of tobacco products (known as "price elasticity"), the average consumer purchases fewer packs when the price increases.
While the federal government would gain some additional revenue from increasing the federal tobacco tax, state governments also depend on tobacco tax revenue and would suffer financially. A hike in the federal tobacco tax would lead consumers to purchase fewer packs of cigarettes. The federal government would still gain revenue because the tax increase, whether 45 cents or 61 cents, is large enough to offset the decline in cigarette sales. State governments, however, would lose out, taxing fewer packs of cigarettes at the same state tax rate. Every state would collect less tobacco revenue under an increased federal tobacco tax. (See Table 1.)
Under the House bill, every state would suffer a budget loss of at least $1 million per year, and 17 states would have losses greater than $10 million per year. Under the Senate bill, every state would lose more than $1.4 million per year, and half of the states would have budget losses of over $10 million per year. California, Ohio, and Pennsylvania would lose over $50 million each under the Senate bill.
With these enormous hits to their budgets, states would need to reduce funding for programs, such as education or transportation, or even eliminate some programs altogether. The Members of Congress who advocate raising the tobacco tax for the SCHIP expansion should be mindful of the consequences this tax increase would have on the fiscal stability of their home states.
Redistribution Would Hurt Most States
Not all states would fare the same under either chamber's SCHIP expansion plan. Under the Senate plan, 29 states would contribute more in tobacco tax revenue than they would receive in SCHIP expansion dollars. For instance, Florida would contribute approximately 7 percent of the increased tax revenues but is projected to receive only 5 percent of the federal allotment for SCHIP funding. Consequently, Florida would suffer a net loss of over $700 million over 5 years. In all, 29 states would wind up losers, 16 states would wind up winners, and 5 states would neither gain nor lose much. (See Map 1.)
An Unreliable Funding Source
Congress's choice of a tobacco tax hike to fund SCHIP expansion might make political sense, but a higher tobacco tax would not be a reliable or sufficient funding source. Already, tobacco tax revenues are in decline as the population of smokers continues to decrease, and the decline in sales of tobacco products would accelerate with a higher tobacco tax. Thus, the additional revenue generated from increased tobacco tax would decrease over time.
Due to this effect, policymakers will somehow need to recruit new smokers if they insist on using the tobacco tax revenue to support SCHIP at proposed funding levels over the long term. In just five years, Congress will need over 9 million new smokers. Reauthorizing the program for 2013 to 2017 would require almost 22.4 million new smokers by the end of that period. To pay for SCHIP, Florida, Texas, and California would have to add about 1.5 million new smokers each by 2017, and other states would have to add smaller numbers. (See Table 2.) While unrealistic, this scenario is apparently what Congress envisions in its SCHIP proposals.
Recommendations for Congress
Congress should consider the unintended effects of SCHIP expansion. Worse than its impact on state budgets, SCHIP expansion would increase dependence on government health care, displace private insurance coverage, and increase government spending. Rather than expand SCHIP, Congress should reauthorize SCHIP so that it:
- Focuses on low-income children. The current bills in Congress allow states to expand eligibility beyond low-income families, the vast majority of whom already have private coverage. Expanding eligibility to children in families with higher income only causes those families to drop private insurance in favor of government-run, taxpayer-funded health care. A more efficient use of SCHIP funds would be to focus only on children in low-income families, prioritizing those most in need.
- Augments private coverage. Instead of expanding a government program, Congress should make private coverage a more affordable option for low-income families. One way to do this within the original scope of SCHIP is through premium assistance, which essentially allows eligible families to use SCHIP funds to subsidize the purchase of health care for their children. Congress should facilitate states' use of premium assistance by removing burdensome administrative procedures.
- Is fiscally sustainable. Current bills in Congress carelessly use the tobacco tax-a declining source of revenue-as the basis for their SCHIP expansion. Moreover, the House bill does not place a cap on SCHIP allotments, thereby creating another open-ended entitlement. Instead, Congress should follow a fiscally responsible approach, focusing only on low-income children and obligating states to operate their programs within their SCHIP budgets.
With a presidential veto likely, the House and the Senate will have the opportunity to revise their respective bills and reauthorize SCHIP as a program that does not harm states but helps them to offer health insurance to children in low-income families in an affordable and efficient manner.
Greg D'Angelo is Research Assistant, and Michelle C. Bucci is Health Policy Fellow, in the Center for Health Policy Studies at The Heritage Foundation. Marcus Newland is an intern in the Center for Data Analysis at The Heritage Foundation.
 Federal Funds Information for States, "Potential Loss in State Revenues from a 61-Cent Federal Cigarette Tax Increase," July 2007, at /static/reportimages/5579068AF0248D9749130DE6D94206E8.pdf.
 See Michelle C. Bucci and William W. Beach, "22 Million New Smokers Needed: Funding SCHIP Expansion with a Tobacco Tax," Heritage Foundation WebMemo No. 1548, July 11, 2007, at www.heritage.org/static/reportimages/F9C5E6A39FF6A8EDF8BCDC3418FD822E.pdf.
 For a description of the methodology employed in this paper, see William W. Beach and Andrew Nowobilski, "22 Million New Smokers Needed: Methodological Appendix," The Heritage Foundation, July 11, 2007, at www.heritage.org/Research/HealthCare/wm1548-methods.cfm.
 For thorough discussions of the House and Senate bills, see Cheryl Smith and Robert E. Moffit, "The House SCHIP Bill: Cutting Medicare, Undercutting Private Coverage, and Expanding Dependency," Heritage Foundation WebMemo No. 1580, August 1, 2007, at www.heritage.org/static/reportimages/CC5D80A3E32E2A7B59EA971EB8854D79.pdf, and Nina Owcharenko and Robert E. Moffit, "Redesigning SCHIP to Strengthen Private Heath Insurance for Working Families," Heritage Foundation WebMemo No. 1564, July 23, 2007, at www.heritage.org/static/reportimages/98E919B9D32B946729993F725BE3F41A.pdf.
 See Andrew M. Grossman and Greg D'Angelo, "SCHIP and 'Crowd-Out': How Public Program Expansion Reduces Private Coverage," Heritage Foundation WebMemo No. 1518, June 21, 2007, at www.heritage.org/static/reportimages/BEBE25A0F901E00E2B1126914F702D5D.pdf.
[6 ] See Nina Owcharenko, "Reforming SCHIP: Using Premium Assistance to Expand Coverage," Heritage Foundation WebMemo No. 1466, May 22, 2007, at http://www.heritage.org/static/reportimages/40B0F2ACC3704C9D63517A602ED2A07C.pdf.